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Coach Inc. Posts Steady Sales Growth and Rising Profitability

Image source: Getty Images.

Luxury accessory retailer Coach (NYSE: COH) posted quarterly results this week that showed progress in its turnaround plan even as a few sales categories endured painful declines.

Here's a look at how the numbers compared to the prior-year period:

 Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Revenue

$1.04 billion

$1.03 billion

1%

Net income

$117 million

$96 million

22%

Earnings per share

$0.42

$0.35

20%

YOY = year over year. Data source: Coach's financial filings.

What happened this quarter?

Coach reduced its reliance on e-commerce promotions and ended availability at several department store chains, and those decisions pushed overall growth down to a tiny 1%. In exchange, the company saw better bottom-line profitability and a healthier inventory position.

Here are the key highlights of the quarter:

  • Overall brand sales fell 3% in the U.S. market as a large, planned pullback from the department store channel offset higher comparable-store sales. Comps rose by 2%, continuing at the prior quarter's steady pace.
  • The international business expanded, with sales rising 7% thanks mainly to strong demand in Europe.
  • Gross profit margin improved to 69% of sales from 68% last year.
  • Expenses trended lower, which -- combined with rising gross margins -- produced a 20% jump in operating income. Operating margin bounced to 18% of sales from 16% last year.
  • The Stuart Weitzman business remained in investment mode, with sales and gross profitability holding flat while segment operating income fell to $5 million from $8 million.
  • Coach's inventory fell 5%, putting it in a leaner position heading into the holiday selling season.

What management had to say

"We are pleased with our performance in the quarter, highlighted by continued positive comparable store sales in North America and growth internationally," CEO Victor Luis said in a press release. Management explained that a few of its strategic initiatives, including its pullback from the department store channel and its investment in the Stuart Weitzman brand, hurt results this quarter.

Image source: Coach.

Yet executives felt the changes were worth the short-term hit. "We implemented the strategic actions necessary to reposition the brand and streamline our distribution in the promotional North American department store channel," Luis explained.

The team is focused on the critical selling season ahead and encouraged by the recent gains they've achieved in profitability and inventory management. "Our performance gives us confidence in the upcoming holiday season and the long-term prospects for Coach," Luis said.

Looking forward

Coach left its full-year outlook in place that calls for sales to increase in the low- to mid-single-digit range in fiscal 2017. Operating margin is still expected to weigh in at about 19% of sales. That's better than the 15% the retailer managed last year, but still well below the 30% figure it posted as recently as fiscal 2013.

Profits would be significantly higher, except for the adjustments management is making to shift toward a steadier, more sustainable business model.

While these moves should hurt sales growth and profits over the next few quarters, Coach believes both changes help elevate the brand in the eyes of shoppers. The steady comps trend suggests the moves might already be contributing to the retailer's momentum heading into its most important quarter of the year.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.