Coach Falls on Forecast of Prolonged North American Slide

Coach Inc., the largest U.S. luxury handbag maker, fell to the lowest level in almost four years after forecasting a prolonged slump in sales at its North American stores.

The shares slid 8.9 percent to $35.69 at the close of trading in New York, the lowest since July 2010. The stock has retreated 36 percent so far this year.

Sales at North American stores open at least a year will fall at a mid- to high-teens percentage rate in the year through June 2015, executives said today on a conference call. The average estimate of 24 analysts surveyed by Consensus Metrix was for a 9.6 percent decline. Comparable sales, including revenue from Coach’s website, may drop at a mid- to high-20s percentage rate.

“This is a bigger haircut in the near-term than people were expecting, they’re really lowering the bar significantly,” Corinna Freedman, a New York-based analyst at Wedbush Securities, said in an interview. “It’s a bit of a risky turnaround at this point.”

Chief Executive Officer Victor Luis has been working to transform Coach into a lifestyle brand selling everything from high-heeled shoes to trench coats after facing increased competition in the handbag segment from the likes of Michael Kors Holdings Ltd.

Rocky Transition

The transition so far has been rocky. North American comparable-store sales plunged 21 percent in the quarter ended March 29. That was steeper than the 15 percent slide analysts had projected and worse than the 14 percent drop during the holiday quarter.

Coach said in a presentation today for analysts and investors that it would close about 70 underperforming stores, according to Freedman who attended the event. The closures are “a teeny drop in the bucket,” she said, for the retailer with more than 950 locations as of June 29, 2013, the end of the last fiscal year.

The company, known for its $300 handbags, now offers a full array of shoes, outerwear and other accessories. Since assuming his position in January, Luis has changed Coach’s design team, which is refurbishing the chain’s stores and will introduce new products this fall.

“It’s been my concern that the brand has declined,” said Freedman, who has the equivalent of a hold rating on the shares. “They expanded too much into outlets and trained their customer to think of the brand as a discount brand. Now they’ve got to retain that customer and bring more customers into the fold and they’re competing in a landscape where more nimble players are eating off their plate.” Freedman said her rating on the stock is under consideration.

Earlier this month, Coach said it will start discounting purses at its North American full-price stores twice a year, breaking with a tradition of being one of the few fashion and luxury companies that refused to discount goods in its domestic shops. The move is consistent with what the brand does overseas.

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