Coach shares jump 11 percent on earnings beat, as M&A rumors still stir

Key Points
  • Coach reported better-than-expected profit before the bell Tuesday, fueled largely by its efforts to cut back on discounts and promotions in U.S. stores.
  • The handbag maker also reaffirmed its full-year 2017 profit and revenue forecasts.
Customers carry Coach Inc. shopping bags after shopping at a store during a charity preview event on the eve of the grand opening of the Outlet Shoppes of The Bluegrass in Simpsonville, Kentucky.
Luke Sharrett | Bloomberg | Getty Images

Coach's strategy to cut back on discounting its products in the U.S. is paying off and finally showing up in the handbag maker's bottom line.

With Wall Street encouraged by the improved performance and possibility the company could start to shift from turnaround mode to growth mode, and expand through acquisitions, the company's shares closed up more than 11 percent Tuesday.

Earlier, Coach reported a better-than-expected quarterly profit. Coach has pulled out of more than 250 department stores, as lower foot traffic in malls has required the company to realign its resources, focus more on e-commerce and increase efforts to attract the millennial shopper.

The luxury retailer reported earnings of 46 cents a share, excluding items, on sales of $995 million for the third quarter. Analysts were expecting Coach to post earnings per share of 44 cents on sales of $1.019 billion, according to Thomson Reuters consensus estimates.

Coach's decision "to elevate the Coach brand's positioning in the North American wholesale channel through a reduction in promotional events and door closures" is the reason for the revenue miss, the company explained.

The company also reaffirmed its full-year profit and revenue forecast, implying Coach's turnaround efforts will carry forward into the remainder of the year.

"In a volatile and complex global environment, we delivered continued positive comparable store sales for the Coach brand in North America and gross margin expansion in each segment, while tightly controlling costs," CEO Victor Luis said in a statement.

"Despite our deliberate pullback in the North America wholesale channel and the impact of calendar shifts, we delivered earnings growth," Luis added.

Coach said its total North American Coach brand sales fell 5 percent to $474 million, from $499 million a year ago. Though North American brick-and-mortar same-store sales — a metric closely watched by Wall Street for retail stocks — rose about 3 percent for the period.

Coach is thought to be exploring acquisitions to further boost its sales. The company made an offer in March to buy rival handbag and accessories maker Kate Spade, but there are other potential bidders, sources have told Reuters.

Coach is also eyeing luxury shoe manufacturer Jimmy Choo, the Telegraph reported last week.

"Now that Coach is on a clear path to recovery we believe it is right for the company to explore options for future growth," GlobalData Retail analyst Neil Saunders said after Tuesday's earnings release.

"Some of this will come from the core brand which has the potential to become more of a lifestyle destination," Saunders wrote. "However, Coach needs to be conservative in this push, if only to avoid the previous pitfalls of ubiquity. ... This is one of the reasons why the company is exploring options to buy other brands."

Saunders said the acquisition of the Kate Spade brand could have a lot of potential for Coach as Kate is "in the early stages of developing its own lifestyle brand and would benefit from Coach's sourcing and distribution expertise, as well as some fresh thinking on the design front."

As for the Jimmy Choo brand, Coach has an advantage there too. Last month, the company hired former Jimmy Choo boss Joshua Schulman as president and CEO of the Coach brand.

As of Tuesday's close, shares of Coach have climbed 23 percent for the year-to-date period, and they are up 4 percent for the past 12 months.

On Tuesday, the stock was the biggest gainer in the S&P 500.

COH 12-month performance

Source: FactSet