Coach Profit Tops Estimates as North American Sales Advance

Coach Inc., the largest U.S. luxury handbag maker, reported fiscal third-quarter profit that beat analysts’ estimates, helped by demand in North America, and said it may sell its Reed Krakoff brand. The shares jumped.

Net income rose 6.2 percent to $238.9 million, or 84 cents a share, in the three months ended March 30, from $225 million, or 77 cents, a year earlier, New York-based Coach said today in a statement. Analysts projected 80 cents, the average of 30 estimates compiled by Bloomberg.

Coach is working to turn itself into a dual-gender lifestyle brand by adding more shoes, jewelry, outerwear and fragrances at its main stores amid increased competition from Michael Kors Holdings Ltd. and Tory Burch LLC. Coach’s new footwear was well-received by consumers while men’s offerings helped drive sales, Victor Luis, who will succeed Lew Frankfort as chief executive officer in January, said in the statement.

“The quarter was really impressive,” Liz Dunn, an analyst at Macquarie Group in New York, said in a telephone interview today. The “two operational highlights” were a North American comparable-store sales gain and an improvement in gross margin, she said.

She rates the shares outperform, the equivalent of buy.

Coach climbed 9.8 percent to $55.55 at the close in New York, the biggest one-day gain since October 2010. The shares are little changed this year, compared with an 11 percent advance for the Standard & Poor’s 500 Index.

‘New Era’

Coach said Reed Krakoff, president and executive creative director, won’t renew his contract when it expires next year. The company will explore options including a possible sale of his namesake clothing and accessories brand to a group including Krakoff. Coach also said it is looking for his successor.

“It is certainly a loss,” Dunn said. “He has been a real architect of the brand. His departure ushers in a new era. The company has a strong design aesthetic and heritage to draw from and I’m sure as they look to find a new lead designer, they will draw on that and not change direction entirely.”

Sales at stores open at least a year in North America increased 1 percent in the quarter. Michael Binetti, an analyst at UBS AG, and Faye Landes, at Cowen Group Inc., estimated a 1 percent drop. Both New York-based analysts rate the shares neutral, the equivalent of hold.

Comparable-store sales in China, meanwhile, grew at a double-digit rate in percentage terms, the company said.

Total revenue increased 7.1 percent to $1.19 billion, topping the $1.18 billion average of analysts’ estimates

Gross margin, the share of sales left after subtracting the cost of goods sold, expanded to 74.1 percent from 73.8 percent a year earlier.

Coach also increased its annual dividend 13 percent to $1.35 today.

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