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Coach (COH) Q3 Earnings Beat Estimates, Guidance Intact

Despite a tough retail environment, Coach, Inc. COH posted better-than-expected third-quarter fiscal 2016 results. The adjusted earnings of 44 cents a share beat the Zacks Consensus Estimate of 41 cents, thereby resulting in a positive earnings surprise of 7.3% and marking the ninth straight quarter of earnings beats. The quarterly earnings increased 22.2% year over year.

 

Net sales of this New York-based company came in at $1,033.1 million, up 11% year over year, and came ahead of the Zacks Consensus Estimate of $1,024 million. On a constant currency basis, sales of this designer and marketer of fine accessories and gifts grew 13%.        

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 and Other Asia.

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 $954 million, while that of Stuart Weitzman brand totaled $79 million for the quarter.

Management aims to reach operating margin of about 20% for the Coach brand in fiscal 2017. In order to attain its target, the company plans to undertake strategic measures involving headcount reduction, upgrading of core technology platforms, enhancement of international supply chain, and management changes. The company expects to incur pre-tax charge of approximately $65-$80 million related to these measures.

Behind the Headline

Total North American Coach brand sales inched up 1% to $499 million (up 2% on a constant currency basis). Direct sales climbed 1% on a dollar basis and 2% on a constant currency basis, while comparable-store sales remained flat. At POS, North American department stores sales dropped at a mid-single-digit rate, while net sales into department stores rose marginally.

International Coach brand sales jumped 5% to $448 million from the year-ago quarter figure. On a constant currency basis, International sales improved approximately 7%. Sales in China rose 2% on a constant currency basis, while in dollar terms the same decreased 2% 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 7% on a constant currency basis, whereas in dollar terms, sales increased 8% from the year-ago quarter due to a stronger yen. Sales for the rest of the direct operations in Asia witnessed robust growth on a constant currency basis but rose marginally in dollar terms, while in Europe sales remained sturdy, marching at a double-digit rate.

Consolidated gross profit grew 7% to $713 million, whereas gross profit margin contracted 260 basis points to 69%. Adjusted operating income came in at $151.8 million, up 4% from the prior-year quarter figure, while operating margin shriveled 30 basis points to 13%.

Store Update

During the quarter, Coach opened 2 stores and closed 16 locations in North America, thereby taking the count to 446. In Japan, total number of locations increased to 196 due to the opening of 2 stores and closure of 1.

In Greater China, the addition of 4 new locations and the closing of equivalent number of stores during the quarter kept the total count unchanged at 181. Across Asia (Other), store count increased to 105 owing to the opening of 2 stores. In Europe, the store count also jumped to 37 following the opening of 2 stores. There were 61 Stuart Weitzman stores at the end of the quarter following the opening of 1 store.

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 hinted that the Stuart Weitzman business is likely to adversely impact consolidated gross margin and operating margin by about 70 basis points and 20 basis points, respectively.

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 $1,282.4 million, long-term debt of $868.5 million and shareholders' equity of $2,625.4 million.

Zacks Rank

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

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