Coach profit jumps as it cuts back on inventory, promotions

People walk past the illuminated facade of a Coach Inc. store in the Tsim Sha Tsui district of Hong Kong, China.
Brent Lewin | Bloomberg | Getty Images

Coach reported a 21.8 percent jump in quarterly profit as the handbag maker's efforts to cut back on inventory and promotions paid off.

The company's shares climbed as much as 3.9 percent to $37.07 in premarket trading on Tuesday.

The 75-year-old company has cut promotions and has pulled products from more than 250 U.S. department stores in a bid to regain its cachet after its bags lost their premium status due to an expansion spree.

Coach has also renovated its stores and hired well-known fashion designer Stuart Vevers to help revive demand.

Customers coming to Coach stores are willing to pay full price or near full price, rather than buy into the brand only when on discount, said Neil Saunders, chief executive of research firm Conlumino.

"Coach remains on the right path to rebuilding its brand image and enhancing profitability," Saunders added.

Coach's North American same-store sales rose about 2 percent, slightly below the average analyst estimate of 2.2 percent, according to research firm Consensus Metrix.

"Metrics such as gross margin & North America comps were better than feared, while inventory levels were clean," Piper Jaffray analyst Erinn Murphy wrote in a note.

Murphy said he had expected North American same-store sales to rise just 0.6 percent.

Gross margin rose to 68.9 percent from 67.6 percent in the first quarter ended Oct. 1 a year earlier, while inventory fell 5 percent.

Net income rose to $117.4 million, or 42 cents per share from $96.4 million or 35 cents per share a year earlier.

Excluding one-time items, Coach earned 45 cents per share.

Net sales rose slightly to $1.04 billion, its slowest growth in four quarters.

Analysts on average had expected a profit of 45 cents per share and sales of $1.07 billion, according to Thomson Reuters I/B/E/S.

Up to Monday's close, Coach's shares had risen nearly 10 percent this year.