Department Store Pullback To Result In Bottom Line Improvement For Coach

Coach (NYSE:COH) is slated to declare its fourth quarter and full year earnings on August 15, for the year ended June 2017, wherein impressive earnings growth on flat revenues are expected. The company’s decision to elevate its brand positioning in the North American wholesale channel is expected to pressure the revenues, but this strategy will reflect positively in the bottom line. Coach’s strategy, of limiting the promotions on its products, and to pull the company’s handbags and leather goods out of 25% of department stores, or by over 250 locations, is expected to result in gross margin expansion. The company’s recent acquisition of Kate Spade won’t be included in this quarter’s earnings, as the deal was completed in the beginning of July.

Brand Transformation And Elevation

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.

Coach is also continuing to establish its modern luxury concept globally, renovating and opening 50 locations in the third quarter, including 17 in the directly operated North American business, taking the total up to 600 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. All these steps undertaken have helped to drive brand elevation. This is reflected in the penetration of the above $400 price bracket products, which increased to 55% of the handbag sales in the March quarter, a massive rise from the 40% seen last year.

Coach has also launched a number of services such as monogramming, leather conditioning, emoji stamps, and a customizable bag program. Across its global fleet, 28 Craftsmanship Bars were installed by the end of the third quarter, with another 7 to be added by the end of the fiscal year.

Improved Performance In Prior Quarters

A positive performance of the company in its second quarter of FY 2017 (ended December 2016), results of which were declared on January 31st, started the year off on a high note. 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 its earnings. While the revenue was in line with the consensus expectations, the company beat the earnings per share estimates by a penny.

The company delivered its third quarter sales on May 1, reporting earnings of 46 cents per share on sales of $995 million. Analysts, on the other hand, had expected an EPS of 44 cents and sales of $1.02 billion. The revenue miss was a result of the decision to limit its merchandise in the wholesale channel. This factor helped in the achievement of gross margin expansion in each segment in the quarter, and consequently substantial growth in its bottom line. Encouraged by the improved performance, and the possibility of additional growth through acquisitions, the stock price of the company shot up over 11%, making it the biggest gainer in the S&P 500 on May 2nd.

See our complete analysis for Coach here

Have more questions on Coach? See the links below:

• Consolidation Continues In The Luxury Retail Industry
• Cutback On Discounts Results In Bottom Line Improvement For Coach Inc.
• Coach Among M&A Speculation Yet Again
• Could Coach Inc. Be A Takeover Target?

See our complete analysis for Coach