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Coach shares slide on 'well worse' earnings

Despite its bid to become a more fashionable, less promotional brand, things are trending in the wrong direction for affordable luxury label Coach.

The leather goods company's shares fell 5 percent on Tuesday after it posted adjusted earnings per share of 36 cents on revenue of $929 million. Although those results fell roughly in line with Wall Street's and the company's soft forecasts, they indicated that things are getting worse—not better—for Coach.

Billy H.C. Kwok | Bloomberg | Getty Images

"Coach's net sales declined 24 percent in North America in the quarter, which we think is the company's worst performance on record," Cantor Fitzgerald analyst Laura Champine wrote in a note to investors. "By comparison, management commented that the broader North American handbag and leather goods market grew in the mid-single digits in the March quarter."

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The company's comparable-store sales in the U.S. also decelerated from the previous quarter, declining 23 percent. Coach's earnings per share fell nearly 50 percent in the quarter, which was "well worse" than the 30 percent drop in the first and second quarters, Wells Fargo analyst Paul Lejuez said.

Coach is attempting to turn around a sales bleed in the United States, where robust promotions and a heavily weighted outlet strategy caused the brand, which is facing increased competition from affordable luxury labels including Michael Kors and Tory Burch, to lose its status with shoppers. To do so, it's tapped a new creative chief, Stuart Vevers, whose design background includes high-fashion labels Mulberry and Loewe.

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In addition to elevating the product and cutting back on promotions, the company is also overhauling its bricks-and-mortar presence, giving its shops what the firm has described as a more modern, elegant feel. It's also updating its look at department stores, and expects to convert more than 300 locations into an open-concept format by the end of the next quarter.

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The initiatives have begun to show some traction. Coach CEO Victor Luis said on the company's earnings call Tuesday that the brand saw an improvement in store traffic as compared to the holidays. He added that its new "modern luxury" stores continued to post positive same-store sales and outperform the remainder of the fleet, though they did not provide a significant contribution to the firm's results.

And while dialing back on promotions took a bite out of the company's sales, Coach's gross margin improved for the first time in nearly two years.

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Since Coach reported its second-quarter results at the end of January, its shares had risen 16 percent, indicating the market was hoping for "more tangible signs of improvement," Lejuez said.

After the announcement, Coach shares were about 5 percent lower, near $40, on Tuesday.

"While shares may remain volatile until more confidence builds from results, we believe Coach is on the right strategic path," Stifel Nicolaus analyst David Schick wrote in a note to investors.