Coach Q2 Earnings Review: Earnings Exceed Expectations But Revenue Growth Disappoints

Coach (NYSE:COH), a leading American marketer of luxury handbags and other fashion accessories, reported its fiscal second-quarter earnings on Tuesday, with net sales totaling $1.27 billion, an increase of 4% over the same period last year. On a constant currency basis, the growth rate is 7%, though analysts had predicted a higher sales figure for the company. The earnings per share, at $0.68, came in above consensus estimates, 5% lower than the corresponding figure of Q2 2014. ^[1] A 7% fall in the North American Coach brand sales is bound to weigh heavily on the revenues of the company, as this segment makes up over 50% of the total sales. However, on a positive note, sales in this segment improved sequentially, led by the retail stores. The international operations experienced robust growth on a constant currency basis, on the back of double-digit increases in Europe, and Mainland China, along with sales gains in Japan. ^[2] The Stuart Weitzman brand, which Coach bought last year, continued to bolster results, with performance in this segment surpassing expectations.

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Coach Carries On With Its Transformation Plan

According to Victor Luis, CEO at Coach, the second quarter results declared by the company reflect “the most significant progress to date” on the company’s transformation plan, despite a tough retail environment. The steps undertaken should ensure the company returns to top line growth this year, and positive sales growth numbers should be accomplished by the fourth quarter. Coach is trying to re-brand its image in the handbag market after heavy discounting and under-investment had tainted its brand. It has dialed back on its promotional events at stores, including Coach days, and has returned to the semi-annual sales model followed by most luxury fashion brands. The number of flash sales at its e-commerce site has also been cut down to a more sustainable six or seven in a quarter. Efforts such as these and shutting down of under-performing stores are intended to have a positive impact on the top-line and improve margins, while at the same time maintaining its brand value. While fewer in-store promotions meant less foot traffic in the first quarter, the company reported a higher average value of retail sales. ^[3] Heavy discounting and a greater than expected promotional activity in the holiday period are the reasons for a negative sales growth for Coach in the second quarter in North America, also impacting the gross margin.

The company reaffirms its target of 40% of its stores to be in the modern luxury format by end of its fiscal year, with 65 stores remodeled globally in the quarter. The company is also making efforts to increase the brand’s international penetration in geographies where it is underrepresented. Greater focus is also being made on its e-commerce and omni-channel initiatives to drive sales.

Coach Is Set For A Positive End To Fiscal Year 2016

After months of continued decline, the company now expects to generate positive comparable store sales in the fourth quarter, as signs of recovery have begun to surface in North America. ^[4] The company had various ‘essential’ products, which were great gifts at key price points during the holiday season. The Coach 1941 collection also received significant attention from top-tier specialty retailers and luxury department stores. The company’s purchase of the Stuart Weitzman brand has been very fruitful, with results exceeding expectations. The company noted the brand’s boots selling particularly well, despite the unseasonably warm weather across most of the United States. Stuart Weitzman has also started gaining recognition internationally, with substantial potential in Asia.

Coach’s digital strategy is also beginning to yield results. The company launched its e-commerce platform in the U.K. in the second quarter and garnered over 0.5 million site visits during this period. Plans have also been made to roll it out across Europe over the next 12 months. In the U.S., Coach is gaining traction through mobile devices, which represent over one-half of the online visits.

The company is also bullish on the prospects of its global men’s business, with sales targeted at $1 billion for 2017, from $680 million in FY 2015. It anticipates the men’s segment to grow by mid-single digits during FY16. Furthermore, Coach is focusing on building its market share within the fragmented men’s and women’s $27 billion global premium footwear category. The company has also backed its guidance for the year, with Coach brand sales to deliver a low, single-digit increase in constant currency for FY16. However, the company has warned on headwinds, coming from foreign currency weakness against a stronger Dollar, adversely affecting the FY16 revenue growth by 225 to 250 basis points. The guidance for the consolidated operating income has been raised based on the second quarter results, in particular sales and margin outperformance of Stuart Weitzman.

Key Financial Results- Q2 2016

• Net sales of $1.27 billion for the second quarter, versus $1.22 billion in the same period of the prior year, an increase of 4%.
• Gross profit totaled $859 million on a non-GAAP basis, an increase over the previous year figure of $841 million.
• Operating income on a non-GAAP basis was $285 million, compared to $299 million in the prior year, while operating margin was 22.4% versus 24.5%.
• Net income on a non-GAAP basis totaled $188 million, with earnings per diluted share of $0.68. The corresponding figures for FY 2015 were $200 million and $0.72.

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1. Coach beats by $0.01, misses on revenue [↩]
2. Coach Form 8-K, January 26, 2016 [↩]
3. Coach Q1 2016, Earnings Call Transcript [↩]
4. Coach Q2 2016, Earnings Call Transcript [↩]