Coach Beats on Q2 Earnings, Revenues Miss Estimates

Coach reported Q2 EPS yesterday of $0.72, $0.06 better than the analyst estimate of $0.66. Revenue for the quarter came in at $1.22 billion versus the consensus estimate of $1.23 billion.

On a constant currency basis sales declined 12% for the quarter. Net income for the period totaled $200 million, with earnings per diluted share of $0.72, excluding transformation-related charges and acquisition costs. Reported net income totaled $183 million, with earnings per diluted share of $0.66. This compared to net income of $297 million and earnings per diluted share of $1.06 in the prior year’s second quarter.

Second fiscal quarter sales results in each of Coach’s segments were as follows: Total North American sales decreased 20% to $785 million from $983 million last year, as expected. North American direct sales declined similarly for the quarter with comparable store sales down 22% including the impact of reduced eOutlet events, which pressured total comparable stores sales by about six points. At POS, sales in North American department stores declined at a high-teens rate versus prior year, while shipments into department stores also declined.

International sales decreased 1% to $421 million from $425 million last year. On a constant currency basis, International sales grew 5% as expected. Sales in China rose 13% on a constant currency basis and 12% in dollars with positive comparable store sales and slower distribution growth. In Japan, sales declined 7% on a constant-currency basis, while dollar sales were 18% below the prior year, reflecting the weaker yen. Constant currency sales for the remaining directly operated businesses in Asia grew slightly, while Europe remained strong, growing at a double digit pace. 

According to Seeking Alpha analysts,  «As evident from the financial results of the company, net sales have failed to deliver in terms of year on year growth. The cause of this problem dates back to Coach’s period of success, owing to discount and promotional pricing, when it focused on major store expansion in order to cater to higher demand for its products. However, now that the company has found itself in a different boat, the vast network of stores is a problem for the company especially since it operates in stores that it has financed through operating leases. Stores located in malls require fixed rental payment. While store closure seems like a possible solution to the combat the downward pressure on margins, it could possibly result in lower sales as well».

Coach recently announced its acquisition os Stuart Weitzman,  the shoe manufacturing company. The move was made in a bid to strengthen the company’s presence in the European market and expand its footwear range offered. The move is one that offers prospects of combating revenue declines from its sluggish handbag segment. With the wheels in motion, it is likely that Coach’s shoe business will improve in terms of revenue generation. However, investors will not see any impact of this deal reflected in the second quarter earnings of the company as the acquisition is expected to close during the second half of the year.