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Coach Falls Most in Two Years on Forecast for Gross Margin

Aug. 2 (Bloomberg) -- Coach Inc., the largest U.S. luxury handbag maker, fell the most in more than two years after saying that a measure of profitability may not improve this year amid higher costs.

Coach fell $4.26, or 6.5 percent, to $61.03 at 4:01 p.m. in New York Stock Exchange composite trading, the biggest decline since March 5, 2009. The shares have risen 10 percent this year.

Chief Financial Officer Mike Devine said today on a conference call to discuss fiscal fourth-quarter earnings that Coach’s gross margin, the share of sales left after subtracting the cost of goods sold, would be “essentially flat” in the current fiscal year compared with the previous year.

“They commented that they wanted us to look at gross margin as flat for the current year, and I was expecting there to be some improvement,” Christine Chen, an analyst with Needham & Co. in San Francisco, said in a telephone interview. “I continue to think that will be the case and that they are trying to keep expectations low.”

Gross margin narrowed 1.5 percentage points to 71.8 percent in the fourth quarter because of “continued sourcing pressures” such as wage inflation in China, Coach said today.

Net income in the period ended July 2 rose 3.6 percent to $202.5 million, or 68 cents a share, from $195.5 million, or 64 cents, a year earlier, Coach said today in a statement. The average estimate of 20 analysts was for profit of 65 cents.

Revenue rose 8.5 percent to $1.03 billion, topping 17 analysts’ $1.01 billion average estimate.

The U.S. Commerce Department reported today that consumer spending dropped 0.2 percent in June, the first decline in almost two years. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase.

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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