Coach Inc.’s Revenue Rises Despite Department Store Pullback

Coach (NYSE:COH) posted its second quarter earnings on January 31, 2016. Amid a challenging and volatile global retail environment, the company was able to deliver top line growth in each of its segments, highlighted by positive comparable sales in North America, and overall gross margin expansion. Despite the department store pullback, the retailer witnessed double digit growth in earnings. While the revenue was in line with the consensus expectations, the company beat the earnings per share estimates by a penny.

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Performance In The Quarter

The second quarter marked the third consecutive quarter of positive comps in North America. Coach brand sales in the region increased 2% on both a reported and constant currency basis, including a negative impact of the department store pullback. Direct sales increased 5% and the brick and mortar store comps rose approximately 4%, driven by higher ticket prices and greater conversion, with traffic down modestly. However, e-commerce negatively impacted the results, driven lower due to the company’s actions to limit the promotional stance online, pushing the aggregate comps down to a positive 3%. Coach has continued to drive brand elevation, with its 1941 collection representing a third of the handbag sales in the top tier retail stores. The penetration of the above-$400 price brackets increased to 50% of the handbag sales, a massive rise from the 30% seen last year.

In the International space, the Coach brand sales increased 3% on a reported basis, and 1% on a constant currency basis, driven higher by a positive performance in China and Europe. Greater China sales were flat when compared to the prior year in dollar terms, but rose 6% on a constant currency basis. Strong results in the mainland were coupled with improved performance in Hong Kong and Macau, which spurred the sales growth. European sales grew at a double-digit pace, positively impacted by new distribution and positive double digit comps. While sales in Japan improved 9% on a reported basis, it fell 2% on a constant currency basis, driven down by a decline in Chinese tourist spending.

Given the strengthening of the dollar, the company has revised its revenue guidance, driven down solely by currency. While earlier the revenue was expected to increase at low-to-mid single digits, including an expected currency benefit of 100 to 150 basis points, the company now expects an increase of low single digits, with a negative foreign currency impact of 50 basis points. This would imply that the currency will pressure the top line by over 100 basis points in the second half of the financial year, based on current exchange rates. The third quarter nominal revenue is expected to fall as a result of the currency impact, and also the calendar shift, which has pushed Easter into the fourth quarter, as compared to the third quarter in the previous year. Furthermore, the strategic initiatives undertaken by the company in wholesale, in terns of the reduced promotions and store closures, will also have a negative impact on the revenue.

Coach Brand Transformation

Coach has been working hard to transform its brand in recent years, in the wake of market share loss to Michael Kors and other rivals, who also employed Coach’s strategy of selling luxury products at affordable prices. The company hired a new designer, Stuart Vevers, who introduced higher end products and undertook to remodel the stores. The retailer has also recruited Selena Gomez to be their new face, in order to appeal to the younger shoppers.

During its fourth quarter and financial year 2016 (ended June), Coach announced its decision to pull the company’s handbags and leather goods out of 25% of department stores, or by over 250 locations, a move which is specifically designed to move away from the discounting that has hurt its luxury brand image. Furthermore, the company intends to reduce the markdown allowances to the channel, citing a highly promotional environment embraced by such stores. The heavy discounts offered in this channel makes it harder for consumers to spend more on a similar bag at the company’s own stores or its e-commerce websites. In the fall, the company closed 120 such locations, and the number of days of sale in the department stores were reduced by about 40%. While this strategic move will bring long term benefits, it negatively impacted sales growth in the quarter by approximately 100 basis points.

Coach is also continuing to establish its modern luxury concept globally, renovating and opening 46 locations in the quarter, including four in the directly operated North American business, taking the total up to 540 globally. This is in line with the retailer’s target to end the year with over 700 stores in the new format, representing a vast majority of the traffic the company receives. This will also be a boost to the earnings, as the comps in such stores exceed those in the balance of the fleet. The mystery shopper scores, a key metric used to assess how well the company delivers its unique modern luxury experience, were up in the quarter at over 85%, compared to 75% in last year’s holiday quarter.

Have more questions on Coach? See the links below:

• Can Coach Inc. Continue With Its Positive Earnings Surprise Streak In Its Second Quarter?
• Part 2: Is There A Way Out Of The Rut For Brick And Mortar Stores?
• Retailing Conundrum, Part 1: Is There A Way Out Of The Rut For Brick And Mortar Stores?
• Retail Companies Get A Boost Amid Border Tax Reform Complications
• Instead Of Just Its Bags, Could The Kate Spade Company Be Up For Sale?
• It’s Raining Promotions This Holiday Season In The Handbag Industry
• Coach Continues With Its Positive Momentum In North America
• Can Coach Continue Its Positive Earnings Surprise Streak?
• Is A Coach-Burberry Merger In The Cards?
• Why Has Coach’s Stock Price Risen 30% In One Year?
• What Is Coach’s Plan With Regards To Its Store Footprint?
• Coach Q4 And FY 2016 Earnings: A Return To Growth In North America
• Why Do We Feel Coach Has A 17% Upside Potential?
• How Will Coach Close Out Its Financial Year?
• What Will Be Coach’s Revenue And EBITDA Breakdown In 2016?
• How Will Coach Perform In 2016?
• What Will Be The Impact of Coach’s Collaboration With Disney?
• How Has Coach’s Revenue Per Square Foot Changed Over The Years?
• What Percentage Of Coach’s Stock Price Can Be Attributed To Growth?
• What Has Resulted In A Decline In North American Net Sales And A Rise in International Sales For Coach So Far In FY 2016?
• Coach’s Strong Presence In China To Help The Company In The Future
• How Did the Different Segments Of Coach Perform In Q3 2016?
• How Has The Transformation Plan Affected Coach’s North American Retail Store Count?
• Coach Q3 2016 Earnings And Revenue Beats Expectations
• What To Expect From Coach In Q3 FY 2016?
• Is Coach’s Transformation Plan Working?
• Coach: Year 2015 In Review
• Is The Men’s Segment Becoming Big Business For Coach?
• How Will Coach’s Revenue And EBITDA Change In The Next 3 Years?
• What Is Coach’s Fundamental Value Based On Expected 2016 Results?

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