Coach earnings top estimates but revenue falls short

Key Points
  • Coach reported better-than-expected top line results but missed Wall Street expectations on its bottom line.
  • The luxury handbag retailer announced on May 8 it planned to acquire Kate Spade for $2.4 billion.
  • Retail analysts have called Coach's "shrinking to grow" plan as one of the few success stories in the industry.
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Coach managed to outpace analysts expectations in the latest period, however a more downbeat forecast sparked a selloff of the company's shares.

Shares of the retailer dropped 6 percent in premarket trading Tuesday.

Coach is projecting full-year fiscal 2018 earnings per share between $2.35 and $2.40, below Thomson Reuters expectations of $2.49 per share. The company also projected softer-than-expected fiscal year 2018 revenue of $5.8 billion to $5.9 billion, below estimates of $6 billion in revenue.

Expectations vs. results:

  • EPS: 50 cents versus 49 cents expected, according to Thomson Reuters.
  • Revenue: $1.13 billion versus $1.51 billion expected, according to Thomson Reuters.
  • North American comparable store sales: up 4 percent versus 3.6 percent expected, according to StreetAccount.

Net income rose to $152 million, or 53 cents per share, from $82 million, or 29 cents per share, in the comparable quarter last year. Excluding items, Coach earned 50 cents per share, outpacing analysts' expectations of 49 cents per share, according to Thomson Reuters.

While revenue rose 6 percent to $1.13 billion, it was shy of the $1.51 billion analysts were expecting.

As it streamlines its business, Coach is also acquiring valuable brands to stay ahead of competitors. On May 8, Coach announced it would acquire Kate Spade for $2.4 billion in an all-cash deal. The company announced July 11 it completed its acquisition of Kate Spade.

Jefferies analyst Randal Konik says the Kate Spade brand is good but is facing a hardy environment. He says that assuming Kate Spade's revenues and standing as a brand will both remain strong "for the next few years" is a "tough call," and sees risk to Kate Spade's earnings moving forward.

"Kate Spade's customers are millennials and we all know millennials are fickle," Konik wrote in a note.

"To assume Kate Spade revenues will meet goals and to assume the standing of the Kate Spade brand will stay very strong for the next few years ia tough calls,

The fashion company was rumored to be pursuing Jimmy Choo before rival Michael Kors signed a deal to buy the high-end shoemaker for $1.2 billion.

In May, retail analyst Simeon Siegel of Nomura Instinet called Coach's "shrinking to grow" plan one of the few success stories in the industry. He said the company's better-than-expected third-quarter earnings were fueled by Coach's efforts to cut back on discount and promotions in U.S. stores.