U.S. News

Coach Earns 61 Cents a Share, Topping Views; Raises Forecast


Coach reported better-than-expected quarterly earnings on Tuesday, helped by strong full-priced sales of its handbags during the holiday season, and raised its full-year earnings and sales outlook.

Net income for the fiscal second quarter that ended Dec. 30, rose to $227.5 million, or 61 cents a share, from $174.2 million, or 45 cents a share, in the year-ago period.

Analysts on average had been expecting 58 cents a share, according to Thomson Financial.

Coach, which sells its signature leather handbags, accessories, shoes and jewelry in department stores and its own stores, said net sales in the latest quarter rose 29% to $836.4 million. Analysts were expecting sales of $800.1 million.

"We have never been more optimistic about our outlook and the potential size of our business than we are today," Lew Frankfort, Coach’s chief executive officer, told CNBC. "Accessories play a much stronger role in updating women’s wardrobes. This is a secular change."

The handbag designer's shares were down, however, as currency conversion rates contributed to a gross margin decline that tempered some investors' enthusiasm. Its gross margin declined 50 basis points as last year's foreign exchange benefit was not repeated and sales growth at
factory stores, where margins are narrower, outpaced growth at full-priced retail stores.

"It's the first down gross margin ever," Morgan Keegan analyst Brad Stephens said. "I think the bears are really going to point to that."

Lew Frankfort, Coach's chairman and chief executive officer, said the latest results got a boost as more visitors to the stores bought merchandise. More customer traffic and higher average transaction prices lifted sales.

Sales at stores open at least a year, a closely watched metric known as same-store sales, were up 25.7% for the quarter, with retail stores up 20.8% and factory store sales up 33.4%.

Sales in Japan, an important market for Coach, grew 17% in constant currency during the quarter.

Raises Outlook

For the second half of the current fiscal year, Coach said it expected to earn about 77 cents a share on sales of at least $1.24 billion.

The company raised its full-year outlook to earnings of $1.71 a share on sales of about $2.63 billion. It had earlier forecast earnings of at least $1.63 a share on sales of about $2.55 billion.

Analysts, on average, had been expecting earnings of $1.67 a share on sales of $2.58 billion for fiscal 2007.

The company opened seven retail and three factory stores in the quarter, bringing its total to 237 retail stores and 90 factory stores.

Coach said it now expects to open 10 more retail stores in North America late in the fiscal year, bringing the yearly total to 40, up from the 30 new stores it had previously projected.