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Coach Q4 Earnings & Sales Surpass Estimates, Stock Rises - Analyst Blog

Zacks Equity Research
Updated

Coach, Inc. COH posted fourth-quarter fiscal 2015 earnings of 31 cents a share that came in ahead of the Zacks Consensus Estimate of 29 cents, thereby resulting in a positive earnings surprise of 6.9% and marking the sixth straight quarter of earnings beat. Consequently, shares jumped roughly 5% during pre-market trading hours.

 

However, what came as a drawback was that earnings per share plunged 47.5% from the year-ago quarter figure, hurt by a fall in net sales and subdued margin performance. Net sales of this New York-based company came in at $1,004.1 million, representing an 11.6% year-over-year decline. However, the top line surpassed the Zacks Consensus Estimate of $970.5 million.

Excluding the currency impact, sales of this designer and marketer of fine accessories and gifts, fell 8%. Also, its North American business remained sluggish. Coach is on track to streamline its North American operations. 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.

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Behind the Headline

Total North American sales declined 20% to $556 million (down 19% on a constant currency basis). Direct sales plunged 20% and 19% on a constant currency basis, while comparable-store sales decreased 19%. At POS, North American department stores sales plunged in the mid-20s, whereas shipments into department stores declined marginally.

International sales fell 5% to $392 million from the year-ago quarter figure. On a constant currency basis, International sales improved approximately 3%. Sales in China increased 5% in dollar terms, while on a constant currency basis, the same rose 4% with a marginal decline witnessed in comparable-store sales.

International wholesale shipments dropped in the high-teens rate, while sales across POS fell marginally. Sales in Japan jumped 2% on a constant currency basis, whereas in dollar terms, sales declined 15% from the year-ago quarter due to a soft yen. Sales for the rest of the direct operations in Asia remained flat on a constant currency basis, while that in Europe remained sturdy, marching at a double-digit rate.

Adjusted gross profit fell 12.2% to $692.4 million, whereas gross profit margin contracted 40 basis points to 69%. Adjusted operating income came in at $126.1 million, down 45.5% from the prior-year quarter figure, while operating margin shriveled 780 basis points to 12.6%.

Store Update

During the quarter, Coach closed 16 locations in North America, thereby taking the count to 462. In Japan, total number of locations decreased to 196 due to the closing of 2 stores.

In China, the addition of 6 new locations during the quarter took the total count to 171. Across Asia (Other), store count increased to 102 owing to the opening of 1 new store. In Europe, the store count increased to 34 following the opening of 3 stores. There were 54 Stuart Weitzman stores at the end of the fourth quarter.

Guidance

Taking Coach as a stand-alone brand, management 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 200 basis points. However, including anticipated sales of $335 million in dollar terms from the addition of the Stuart Weitzman brand to its portfolio, revenue is expected to increase in high-single digits and contribute 9 cents a share to the bottom line.

Gross margin is expected to be approximately 70% on a constant currency basis, whereas foreign currency fluctuations will weigh upon margins by 80–100 basis points. Operating margin is 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 $1,525.8 million, long-term debt of $879.1 million and shareholders' equity of $2,489.9 million.

Zacks Rank

Currently, Coach carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Columbia Sportswear Co. COLM, sporting a Zacks Rank #1 (Strong Buy), G-III Apparel Group, Ltd. GIII and Lululemon Athletica Inc. LULU, both carrying a Zacks Rank #2 (Buy).

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