Coach Sliding After North American Comparable Sales Plunge 21%

Maggie McGrathForbes Staff

For struggling handbag maker Coach COH -8.45%, it would appear that not even a little bit of good news is good enough. The luxury brand reported Tuesday morning that its third quarter profit beat Street estimates by a 5-cent margin, but shares of the company are falling fast in early Tuesday trading after a more-than 20% comparable sales drop in North America lends further credence to the idea that Coach has lost its cachet with American customers.

Coach reported $1.1 billion in third quarter revenue, a 7% decline over the $1.19 billion reported in the prior-year period and a figure that comes in just below the analyst consensus of $1.13 billion. Third quarter net income came in at $191 million, resulting in profit of 68 cents per share, a figure that beat the Street by 5 cents but fell under the $239 million and 84 cents per share reported for the same time in 2013. It’s also worth noting that this EPS figure includes a 5-cent per-share benefit from what Stifel analyst David Schick called an “unexpectedly low tax rate.”

Continuing a trend reported in its first and second quarter earnings results, Coach’s women’s handbag sales in North America were a particular drag on the company, offsetting growth in the company’s men’s, footwear, Asian and European sales and leading North American sales to decline 18% to $648 million, down from $792 million during the same time in 2013. On a comparable-store basis, North American sales declined 21%.

“Our business in North America remained challenging in the period, exacerbated by the weather and shift of the Easter holiday. We experienced sharply lower traffic levels in our stores while our internet results were impacted by our strategic decisions to eliminate third party events, as well as limit the access and invitations to our factory flash site,” Victor Luis, Coach CEO, said in a statement.

In a conference call with investors Tuesday morning, Luis noted that within women’s handbags, leather products continue to outpace logo-based products, and Coach factories are working to keep pace with that trend. Luis made many references to brand transformation and the company’s turnaround efforts, later noting that “it’s unfortunate” analysts and investors can’t see the internal company mechanisms that are working towards brand transformation. “The actions we are taking move in a very positive direction and I’m very excited about sharing that with all of you” on Coach’s investor day in June,” he said.

Outside of North America, Coach’s results were much stronger, with international sales growing 14% to $441 million, up from $385 million last year. Solid results in China, where sales increased 25% to $540 million, helped boost the company’s international results.

Coach also announced Tuesday morning that its board of directors has approved a quarterly cash dividend of 33.75 cents per share, to be made payable on June 30 and maintaining the company’s annual rate of $1.35. In a conference call with investors, Coach CFO Jane Nielsen noted that given the current outlook for the business — which includes a mid-single digit decline on a constant currency basis and high single digit decrease on a dollar basis for full-year 2014 earnings – the company does not anticipate further share repurchases during remainder of fiscal year 2014.

Some initial analyst reactions found reason to be cautiously optimistic: “We are encouraged on EPS given better than expected margins and expense control; furthermore, we believe Coach product is steadily looking more focused and centered on key silhouettes versus over assorted collections,” wrote Citi analyst Oliver Chen in an early Tuesday note, while Stifel analyst Schick highlighted the company’s 13 net store closures in North America, which Schick sees as the ”first step showing new management is more willing to right-size the store base.” Brian Sozzi, chief equities strategist of Belus Capital Advisors, meanwhile, took a more cynical approach,tweeting, “When a company says they are on a ‘multi year journey,’ run.”

Likewise, early investor reaction was anything but positive: shares of Coach fell 4.5% in pre-market trading upon the initial release of the earnings results and only continued to fall from there, dropping 5%, then 7%, then more than 9% as Tuesday’s opening bell approached. The stock eventually opened at $46.17, a more-than 8% decline over Monday’s closing price. Year-to-date, Coach is down nearly 10%.