Coach Inc. Maintains Momentum Through a Challenging Holiday Season

By Demitrios Kalogeropoulos Markets Fool.com

Image source: Getty Images.

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Heading into its holiday-season earnings report, investors were cautiously optimistic that luxury retailer Coach (NYSE: COH) would show progress in its turnaround plan despite weak demand trends in the broader industry. The company this week delivered on that promise, as sales and profit growth in the second quarter of its fiscal year kept it right on track to meet management's full-year targets.

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

Metric

Q2 2016

Q2 2015

Year-Over-Year Growth

Revenue

$1.32 billion

$1.27 billion

4%

Net income

$200 million

$170 million

18%

EPS

$0.71

$0.61

16%

Data source: Coach's financial filings.

What happened this quarter?

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Sales growth sped up to a 4% pace from 1% in the prior quarter as the negative impact from a planned pullback in the U.S. wholesale business lessened. Pricing discipline and cost cuts, meanwhile, helped power surging profits.

Here are the key highlights of the quarter:

  • Brand sales rose 2% in the U.S. market, compared to a 3% drop last quarter. That growth consisted of a 4% gain at physical Coach locations, a slight drop in e-commerce revenue, and a huge, planned decline in the department store segment.
  • International markets rose 3% for a slowdown from the prior quarter thanks to flat sales in the China division that were outweighed by solid gains elsewhere.
  • Gross profit margin improved to 69% of sales from 67%.
  • Expenses increased at a faster pace than revenue as Coach took a hit from a stronger U.S. dollar, increased marketing spending, and continued investment in its Stuart Weitzman rollout. Yet operating margin still ticked up to 21% of sales from 20.5% a year ago.
  • Stuart Weitzman brand results included a 26% jump in revenue and steady gross profitability that was just slightly below the company average.

What management had to say

"We are both pleased and proud of our performance this holiday season, particularly in light of the challenging and volatile global retail environment," CEO Victor Luis said in a press release. "Our team delivered top-line growth in each of our reportable segments," Luis continued, "highlighted by positive comparable store sales in North America and overall gross margin expansion."

Image source: Coach.

Luis mentioned a few other positive trends Coach noticed over the holidays: "We were also thrilled with Stuart Weitzman's results this quarter ... We advanced our leadership position in fashion boots and booties during the key winter selling season, while driving global awareness and brand relevance through impactful marketing and the launch of key global flagships alongside the Coach brand openings on Fifth Avenue in New York and Regent Street in London."

Looking forward

Coach lowered its full-year outlook slightly, but only to account for a surprise shift in exchange rates. The company had expected reported sales to benefit by roughly a full percentage point from currency effects, but now it sees exchange rates hurting sales by nearly the same amount. As a result, revenue will likely rise by around 3% rather than 5%. The operating margin target held steady at 19% of sales, a solid improvement over 2016's result.

These forecasts don't imply robust growth, but are more consistent with a generally tough retailing environment. But the targets do show progress toward Coach's brand reboot goals. At the same time, investors can breathe a sigh of relief that the company emerged from a difficult holiday shopping season with sales growth intact and with earnings still on track to rise by double digits for the year.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Coach. The Motley Fool has a disclosure policy.