Coach Inc Earnings: Green Shoots Are Back in Fashion

By Markets Fool.com

Source: Coach

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Coach stock was up roughly 7% near the end of the trading day Thursday as the company delivered an encouraging earnings report for the essential December-ended quarter. Although Coach is not definitively out of the woods yet, there are some clear signs for optimism.

Sales are still bad, but they seem to be improving
Total sales during the quarter ending on Dec. 27 came in at $1.22 billion, a year-over-year decline of 14% in U.S. dollars and falling 12% on a constant currency basis. Wall Street analysts were on average forecasting $1.23 billion in sales during the quarter, so the number is slightly below forecasts.

Sales in North America fell 20%, to $785 million from $983 million in the year-ago quarter, while same-store sales in North America were down 22%. This includes the impact of reduced eOutlet events, which according to management reduced comparable-store sales by about 6%. While the comps number does not seem very encouraging at first sight, it's important to note that this represents a sequential improvement, versus a decline of 24% in North American same-store sales during the prior quarter.

Currency headwinds were a big drag on international sales, but the company is doing much better overseas than at home. International sales decreased 1% in U.S. dollars to $421 million, but they grew 5% on a constant currency basis.

Sales in China, a big market for Coach, rose 13% on a constant currency basis and 12% in U.S. dollars, which management attributed to "positive comparable-store sales and slower distribution growth." Importantly, this represents an acceleration versus a 10% increase in China sales during the September-ended quarter.

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Japan remains quite weak, though -- sales declined 7% on a constant-currency basis, while U.S. dollar sales crashed by 18% due to the big devaluation of the yen.

Signs for optimism
Gross profit margin was almost flat versus the year-ago quarter, in the neighborhood of 69% of sales. Stable margins are quite unusual when sales are falling steeply, and the fact that Coach is managing to sustain profitability is a major positive when evaluating the company's pricing power and merchandising strategy.

The numbers are showing that Coach is selling fewer products, but the company is doing so at considerably stronger prices, which is quite encouraging when evaluating the health of the turnaround and the brand transformation.

Also, inventory levels declined by a strong 19% versus December of 2013. This is a major plus, since inventories falling faster than sales indicate that Coach is moving its products quickly from the shelves and making the right merchandising decisions.

Reported earnings per share came in at $0.66, while earnings per share excluding transformation-related charges and acquisition costs were $0.72. The figure was above estimates, as Wall Street was forecasting $0.66 per share during the quarter.

Interestingly, this was the fourth consecutive quarter in which the company reported better than expected earnings, so there seems to be some kind of trend going on.

"Green shoots" emerging
CEO Victor Luis sounded reasonably optimistic regarding the company's performance during the quarter and the prospects for a sustained turnaround.

We are encouraged by the green shoots we are seeing in our business, as our brand transformation begins to take hold across the three brand pillars of product, stores and marketing. We continue to be focused on the execution of our strategy with the launch of Stuart Vevers' spring collection across all channels, our Fall 2015 New York Fashion Week presentation next month, and the ongoing implementation of our previously stated fleet optimization plan.

The green shoots metaphor has been used and abused repeatedly by all kinds of companies in the midst of a turnaround. However, there are valid reasons for optimism in Coach's latest earnings report.

While the headline sales numbers look quite dismal, performance in North America is actually improving sequentially, and growth in China is even accelerating. Besides, robust profit margins and falling inventory levels bode well for the company going forward. All in all, Coach seems to be clearly, albeit slowly, moving in the right direction.

The article Coach Inc Earnings: Green Shoots Are Back in Fashion originally appeared on Fool.com.

Andrs Cardenal owns shares of Coach. The Motley Fool recommends Coach. The Motley Fool owns shares of 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.