Investors Lighten Up on Coach

The shares fell Tuesday after the handbag maker discontinued its corporate business

Coach's (COH) handbags remain popular with the public, but its shares got a frosty reception from investors on Apr. 24. The New York company announced surging sales and income during recent months, but also warned of lower earnings after discontinuing a business targeted to distributors.

Net income rose 45% year over year to $147 million during the three months ended March 31. Net sales rose 30% to $625 million. "Our third quarter results exceeded our expectations, driven by the overall strength of the brand, great product performance and continued expansion in the North American handbag and small leathergoods market," CEO Lew Frankfort said in a press release Apr. 24.

But during the quarter Frankfort stopped Coach's Corporate Accounts business, which sells products mainly to distributors for gift-giving and incentive programs, in an attempt to better control his company's brand image. Including the discontinued operations, Coach's net income rose 38% year over year to $150 million during the quarter.

The company ended up earning 39 cents per share during the March quarter, or 40 cents including discontinued operations. Before hearing the news about the Corporate Accounts business, analyst surveyed by Thomson Financial had expected 38 cents.

So far Coach's sales at stores open more than a year have surged at a double-digit rate in each of the last 20 consecutive quarters. In Japan, sales grew 15% in constant currency during the March quarter, after Coach opened five new retail locations and expanded three others. In the U.S. the company opened seven U.S. retail stores, bringing the total to 244 retail and 90 factory stores as of March 31.

The question remains as to how long this growth can last. "Although we don't believe Coach can maintain the average 29% annual top-line growth rate it has posted during the last five years, we do think expansion opportunities exist," Morningstar analyst Kimberly Picciola said in a note Apr. 20. She thinks Coach's international expansion, particularly in Asia, will be key for future growth.

Coach now estimates it will have $1.67 earnings per share for the full fiscal year ending June 30, 2007, compared to the consensus of $1.72, which the company says included a 10 cents contribution from discontinued operations. During fiscal 2008 Coach thinks it will have EPS of at least $2.02, compared to a $2.09 consensus that included an 11 cents contribution from discontinued operations.

Investors sold the stock 6.4% to $49.92 per share in early afternoon trading on the New York Stock Exchange on Apr. 24.

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