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Coach Profits Leap 41.4% as Brand Plans 100 More U.S. Stores

NEW YORK — The brand may be "Coach," but to judge from its earnings and forecast, it definitely flew first class in the second quarter.Coach...

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NEW YORK — The brand may be "Coach," but to judge from its earnings and forecast, it definitely flew first class in the second quarter.

Coach Inc., self-described marketers of "American accessible luxury" leather accessories, said Wednesday a solid holiday performance drove its quarterly profit and sales higher than expectations, prompting it to raise its forecast for the full year as the ongoing clamor for its handbags here and in Japan offset weak market conditions.

The New York-based company said that in the second quarter ended Dec. 28, profits rose 41.4 percent to $62.4 million, or 68 cents a diluted share, beating previously raised consensus estimates of 66 cents. Last year, Coach reported earnings of $44.2 million, or 49 cents. Sales shot up 30.9 percent to $308.5 million from the year-ago mark of $235.8 million.

The better-than-expected profit drove Coach’s shares up $3.31, or 11.4 percent, to close at $32.48 in New York Stock Exchange trading Wednesday. In the past 12 months, Coach’s shares have traded as high as $35.70, reached Dec. 2, and as low as $17.19, reached July 24.

"What we are experiencing, during our renaissance, is a growing market share as we attract a growing number of new and stylish consumers to the franchise and maintain our strong classic consumer base," Coach chairman and chief executive Lew Frankfort said in a brief telephone interview. "No one else in accessories offers accessible luxury across multiple channels and different geographies."

Direct-to-consumer sales, which consist primarily of transactions at U.S. Coach stores, increased 19 percent to $191.5 million from $160.5 million last year, while comparable-store sales for the quarter rose 12.7 percent, with retail stores up 18.1 percent and factory store sales up 5.8 percent. Indirect sales — including Coach Japan, U.S. department stores, international wholesale operations and special markets — rose 56 percent to $117.1 million from $75.3 million in the same period last year.

On a morning conference call with analysts and investors, Frankfort said, "In U.S. retail, our 18 percent comp reflects increases in both traffic and higher conversion rate as we continue to attract a consumer more predisposed to purchase." In addition, he said Coach experienced significant increases in sales at U.S. department stores as point-of-sale sales rose about 25 percent in the quarter. He also said Coach had double-digit comp performance in Japan.
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While holiday sales were indeed a standout, Frankfort outlined steps, including product innovation and store expansion, for Coach to achieve sustained accelerated financial growth and continued market share increases. Coach’s intention, he noted, is to double its market share of premium handbag and small accessories users over the next three to five years. Today, those figures stand at between 15 and 20 percent domestically and, in Japan, between 2 and 3 percent.

As ubiquitous as Coach handbags may appear, Frankfort said the firm can attract a new and stylish army of shoppers into the franchise while evolving the loyal Coach user by driving product through fashion innovation and product diversification.

For example, he said this spring Coach will introduce new styles, colors and silhouettes — like a new Signature bag with mini logos and a Hampton weekend tote, its first entry into the casual weekend segment — to keep the existing assortment fresh. Coach also will update its hats, gloves and scarfs with new fabrics and styles.

In addition, it will introduce women’s footwear to 20 additional stores next week, bringing the total to 80 retail stores.

Frankfort wants to add 100 retail stores in the U.S. in the next four to five years, expanding Coach’s U.S. store count here to at least 250, excluding outlets. In the same time frame, it seeks to add 25 Japanese stores to its current base of 89. He also wants to raise Coach’s awareness as a "365-day lifestyle accessory resource" for self-purchase and gift-giving by continuing to integrate its in-store, direct mail, Web site and advertising functions.

Frankfort said that while he sees Coach as an American brand, with nearly 80 percent of sales originated in the U.S., the second-largest opportunity to grow is in Japan. Coach believes it can increase market share to 6 percent of Japan’s $4 billion imported handbag market through more stores and double-digit comp expansion. Japan is essential to Coach’s plans, as Japanese women account for about 45 percent of the world’s global spending on luxury handbags and accessories, versus 25 percent of her American counterpart.

Michael┬┐Devine, chief financial officer, said on the call that he expects earnings for fiscal 2003, ending June 28, to hit at least $1.40 a share, a 45 percent increase over 2002, compared with analysts’ current consensus estimates of $1.33. He based his expectations on operating income growth of about 55 percent with operating margins exceeding 23 percent based on sales growth of at least 25 percent, to $900 million, with double-digit comp gains in both U.S. and Japan locations. The forecast assumes gross margins of about 70 percent versus 67.2 percent last year and a 100 basis point reduction in selling, general and administrative (SG&A) expenses.
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Also built into the guidance, Devine said, is a second-half EPS of at least 48 cents, with the third and fourth quarters about equal, versus the 34 cents reported for the same period in 2002 and analysts’ expectations of 42 cents. Sales are expected to grow 20 percent while comps should increase in the high-single-digit range.

Impressed with the results, Ann-Marie Peterson, an analyst with Thomas Weisel Partners, said Coach is in the "sweet spot" of many trends, including the shift to value and the growing importance of accessories.

"Coach is doing a tremendous job at educating women to the importance of accessories and giving them a product each season to do that and saying that handbags are not a replacement-driven product, but fashion-driven."

For the first half, profits rose 49.7 percent to $84.9 million, or 92 cents, versus year-ago profits of $56.7 million, or 63 cents. Sales amassed to $501.3 million, an increase of 29.7 percent over the $386.5 million reached in the first half of 2002.