Coach Continues With Its Positive Momentum In North America

COH: Coach logo

Coach (NYSE:COH) released its fiscal 2017 first quarter results on November 1, 2016, for the period ended October 1, 2016. The company’s EPS was in line with estimates, but it missed out on revenue.

Coach- Q1 2017- 1

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The North American segment of the Coach brand continued its positive comparable sales growth, even though sales fell 3% in the quarter. This was a direct result of a deliberate department store pullback and a reduction in reliance on e-commerce promotions. These steps are being taken to elevate the brand positioning, which was reflected in the above-$400 price bracket rising in penetration to over 50% of the handbag sales, up from ~30% last year. This further drove the handbag AURs (Average Unit Retail) to over $300. While these efforts have resulted in a slow growth, an overall rate of 1% for the company, it has resulted in a better bottom line performance and a healthy inventory position. The company was able to reduce the inventory from $575 million in the year ago period, to $547 million at the end of the September quarter, putting it in a better position heading into the holiday selling season.

The International business continued to grow strongly, with sales rising 7%, driven primarily by Europe, where sales grew at a double-digit pace, due to new distribution and positive double-digit comps. Post the Brexit vote, sales in the UK have increased at a higher rate as a result of a weaker currency and increased traction with the local consumers. Growth in Mainland China also increased by double-digits, offset by continued weakness in Hong Kong and Macau, which resulted in an overall flat growth in the Greater China region on a reported basis, and 5% on a constant currency basis.

The expenses for the company trended lower, and this, coupled with a rising gross profit margin, resulted in a 17% jump in the operating income, and a rise in the operating margin by 230 basis points to 16%. The company also continued its investment into the Stuart Weitzman brand, in order to drive global awareness and brand relevance, and to gain traction with the international and millennial consumers.

Coach- Q1 2017- 2

Coach also reaffirmed the FY 2017 guidance outlined earlier, wherein it expected a low-to-mid single digit growth in revenue, and a double-digit growth in both net income and earnings per diluted share. The operating margin is expected to be between 18.5% and 19% for the year, which incorporates the negative impact of Stuart Weitzman and the strategic decision to elevate the Coach brand’s positioning in the North American wholesale channel, including a reduction in promotional events and a closure of about 25% of stores. These efforts will drive the positive momentum in North America, as it heads into its most important quarter of the year.

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