Coach (COH) Q2 Earnings Tops Estimates but Revenue Misses

Despite tough retail environment, Coach, Inc. COH posted better-than-expected second-quarter fiscal 2016 bottom-line results. The quarterly earnings of 68 cents a share beat the Zacks Consensus Estimate of 65 cents, thereby resulting in a positive earnings surprise of 4.6% and marking the eighth straight quarter of earnings beat. Consequently, shares jumped roughly 3% during pre-market trading hours.

What came as a drawback was that earnings per share fell 5.6% from the year-ago quarter figure, hurt by subdued margin performance. Net sales of this New York-based company came in at $1,273.8 million, up 4.5% year over year. However, the top line fell short of the Zacks Consensus Estimate of $1,298 million. On a constant currency basis, sales of this designer and marketer of fine accessories and gifts grew 7%.  

Coach is on track to streamline its North American operations and expects to deliver positive comparable-store sales by fourth quarter. The company’s international operations witnessed robust growth on a constant currency basis, on the back of double-digit increases in Europe, and Mainland China, along with sales gains in Japan.

Moreover, the company is undergoing a brand transformation and is introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman has been accretive to its performance, and is being viewed as a significant step in its efforts toward becoming a multi-brand company. Management highlighted that net sales for the Coach brand aggregated $1.18 billion, while that of Stuart Weitzman brand totaled $94 million for the quarter.

Behind the Headline

Total North American Coach brand sales declined 7% to $731 million (down 6% on a constant currency basis). Direct sales fell 7% on a dollar basis and 6% on a constant currency basis, while comparable-store sales decreased 4%. At POS, North American department stores sales dropped at a mid-single-digit rate, while net sales into department stores decreased to an equivalent degree.

International Coach brand sales jumped 4% to $437 million from the year-ago quarter figure. On a constant currency basis, International sales improved approximately 9%. Sales in China increased 2% in dollar terms, while on a constant currency basis, the same rose 5% with double-digit increase and positive comparable-store sales on the Mainland partly offset by sustained sluggishness across Hong Kong and Macau.

Sales in Japan advanced 2% on a constant currency basis, whereas in dollar terms, sales declined 3% from the year-ago quarter due to a soft yen. Sales for the rest of the direct operations in Asia increased modestly on a constant currency basis but fell in dollar terms, while in Europe sales and comparable-store sales remained sturdy, marching at a double-digit rate.

Consolidated adjusted gross profit grew 2.2% to $859.1 million, whereas gross profit margin contracted 160 basis points to 67.4%. Adjusted operating income came in at $285 million, down 4.7% from the prior-year quarter figure, while operating margin shriveled 210 basis points to 22.4%.

Store Update

During the quarter, Coach opened 1 store and closed 3 locations in North America, thereby taking the count to 460. In Japan, total number of locations decreased to 195 due to the closure of 2 stores.

In Greater China, the addition of 6 new locations and the closing of 1 during the quarter took the total count to 181. Across Asia (Other), store count remained at 103 owing to the opening and closing of 2 stores each. In Europe, the store count also remained at 35 following the opening and closing of 1 store each. There were 60 Stuart Weitzman stores at the end of the quarter following the opening of 4 stores.

Guidance

Taking Coach as a stand-alone brand, management continues to projects low single-digit growth in revenue in constant currency for fiscal 2016, on a 52-week basis. Management cautioned that foreign currency headwinds would adversely impact revenue growth by 225-250 basis points.

However, including anticipated sales of $340 million in dollar terms from the addition of the Stuart Weitzman brand to its portfolio, total revenue for the company is expected to increase in high-single digits on a constant currency basis and contribute 12 cents a share to the bottom line.

Coach brand’s gross margin is expected to be in the range of previous year’s margin of approximately 69½% on a constant currency basis, whereas foreign currency fluctuations will weigh upon margin by 90–100 basis points. Operating margin for the Coach brand is still envisioned to be in the mid-to-high teens.

Management expects the 53rd week in fiscal 2016 to generate revenues of approximately $75–$80 million and add earnings per share of 6 cents.

Other Financial Details

Coach ended the quarter with cash, cash equivalents and short-term investments of $1,337.1 million, long-term debt of $872 million and shareholders' equity of $2,567.3 million.

Zacks Rank

Currently, Coach carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Abercrombie & Fitch Co. ANF, Express Inc. EXPR both sporting a Zacks Rank #1 (Strong Buy), and Hanesbrands Inc. HBI carrying a Zacks Rank #2 (Buy).

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