Premium retailer Coach (COH, Financial) is having a tough time in attracting customers. Its shares have plunged 18.3% in the last year. Although it has been able to beat the analysts’ earnings expectations in all the last four quarters, its revenue is unable to compete. Because of lower demand for its upscale products, it is witnessing a sharp decline in its sales. Nonetheless, the retailer seems to be managing its way out. Its recently reported quarterly results were in line with the Street’s expectations. Let’s take a look.
The results are yet so attractive
Sales for the quarter dropped 14% to $1.22 billion, as compared to the previous year. The top line was affected mainly because customers reduced their purchases of expensive handbags. Coach’s decision to reduce its promotions resulted in lower sales of the company. Demand in the domestic market was hit hard by a 20% decline in the total revenue from the region, clocking in at $785 million. Comp sales from the region slipped 22% during the quarter. This was an improvement over last quarter’s drop of 24%.
Revenue from the international segment also declined 1% to $421 million. However, this drop was mainly due to unfavorable currency fluctuations. Excluding the currency effect, revenue grew 5% over last year. China registered a growth of 13%, whereas Japan fell 7%mainly because of the levy of a consumption tax in the last year.
The margins of the company also shrank to 68.9% from 69.2% in the prior year. Further, the earnings of the company dropped to $0.72 per share from $1.06 per share, a year ago. Nonetheless, the bottom line was ahead of the Street’s expectations of $0.66 per share.
The remodeling initiative
Coach was benefited by its initiative of remodeling its stores in order to have a new image as a lifestyle brand, showcasing products such as shoes, apparel, accessories and handbags. It had remodeled 20 stores previously, which witnessed higher sales during the quarter and performed much better than the existing stores. The new concept stores witnessed more customer traffic that made a purchase during the all-important holiday season.
Hence, the retailer plans to remodel 150 existing stores and also open 50 to 60 new stores by the end of the year. This should help the company witness higher sales.
Tough competition
Coach faces tough competition from its peers, such as Michael Kors (KORS, Financial) and Kate Spade (KATE, Financial). On one hand Coach registered a decline in its same store sales and on the other, peer Kate Spade reported a 24% increase in the same. Competitors have been able to attract shoppers by having celebrity designers for the design of their product. However, Coach too is trying to combat competition, Hence, it added better designs and is using even higher quality materials.
Final words
The upscale retailer announced the acquisition of Stuart Weitzman, an upscale shoe brand for $574 million. Through this buyout Coach is trying to expand its focus to other products such as shoes and apparel also. This should help the company grow in the future. Coach’s expensive bags have become quite popular with the customers and handbags which are above $400 now make 30% of its handbag sales, as compared to 20% in the last year. Moreover, it is in the process of expanding its men’s collection and online business. All these initiatives make Coach’s future look bright. Investors should watch this company closely.
