Coach Earnings: Making Progress

By Markets Fool.com

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Coach (NYSE: COH) this week reported earnings for the quarter ended in June, the fourth quarter of fiscal 2016 for the company. The numbers were roughly in line with Wall Street expectations, and financial performance during the quarter indicates that Coach's turnaround is right on track.

The top line

Net sales amounted to $1.15 billion during the period, a year-over-year increase of 15% on both a reported and constant-currency basis. The fourth quarter of fiscal 2016 included 14 weeks versus 13 weeks in the same quarter last year, and the additional week contributed nearly $84 million in revenue. Net sales for the Coach brand grew 11% to $1.07 billion, while the Stuart Weitzman brand contributed $84 million in revenue during the quarter.

Sales in North America are clearly improving, and this is a key contributor in terms of overall financial performance. Coach brand sales in North America grew 9% to $606 million. That figure includes $44 million associated with the extra week in sales this year. Total North American comparable-store sales grew 2%, with e-commerce contributing 1% to comparable-store sales growth. Direct sales in North America increased 10% during the period.

International Coach brand sales grew 15% in U.S. dollars and 13% in constant-currency terms, amounting to $450 million during the quarter. This includes $32 million in revenue during the additional week of sales in 2016. Sales in the Greater China region grew 5% in U.S. dollars and 10% in constant currency, while Japan delivered a 7% increase in U.S dollar sales and a 5% decline in constant-currency revenue during the quarter.

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Margins and earnings

Coach is actively working to improve brand perception and pricing power. The company has closed unprofitable stores, improved the quality of its designs, and positioned itself as a modern luxury brand in the fashion and accessories industry. This effort is bearing fruit in terms of increasing profitability.

Operating income amounted to $117 million, or 10.1% of revenue. As a reference, operating margin was 3.9% of sales in the same quarter last year. Net income totaled $82 million, with earnings per diluted share amounting to $0.29, a substantial increase versus $0.04 in earnings per share during the fourth quarter of fiscal 2015. On a non-GAAP basis, earnings per share came in at $0.45, a 47% increase year over year.

The company ended the year with $459 million in inventory, a decrease of 5% versus $485 million at the end of the previous fiscal year. Lean inventory levels are a positive sign for investors, as it shows that the company is making the right merchandising decisions and inventory is rotating rapidly.

Moving forward

Coach CEO Victor Luis was pleased with the company's performance in the context of a challenging retail environment:

Our strong fourth-quarter results -- in which we achieved positive North America comparable-store sales and drove increases across key financial metrics -- capped a year where we returned the Coach brand to growth. At the same time, we elevated brand perception globally. I couldn't be more pleased with our team's execution of the transformation plan over the last two years, as we tracked to our goals in spite of the significant and unanticipated volatility in tourist spending flows, as well as macroeconomic and promotional headwinds.

For fiscal year 2017, management is expecting revenue to increase by low- to mid-single digits, including 100 to 150 basis points in expected benefits from favorable currency movements. Operating margin is forecast to be in the range of 18.5% to 19% of revenue, and earnings per share are expected to increase in the double digits year over year.

Fashion retail is a remarkably challenging environment, and this will probably remain a headwind for Coach over the coming quarters. Nevertheless, the company is clearly making sound progress in terms of driving sales growth and improving profitability.

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Andrs Cardenal 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.