Coach Earnings Preview: Turnaround in Place?

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Coach is a business in transition. The handbags and accessories company is trying to reinvigorate the brand and jump-start growth via a renewed focus on fresh designs in the modern luxury category. The company is scheduled to report earnings for the fourth quarter of fiscal 2015 on Tuesday, August 4, and the release will provide a great opportunity for investors to evaluate the health of Coach's turnaround efforts.

The planCoach was one of the hottest names in the fashion industry until a few years ago. Management made a series of important mistakes that hurt the brand and drove customers away from the company. Coach expanded its store base too much, and it resorted to big and frequent discounts to move inventory from the shelves. This strategy worked well for a while, but it ultimately diluted the brand's image and reputation.

Coach lost its touch with customers, and competitors such as Michael Kors, Kate Spade, and Tory Burch gained a lot of terrain versus the company with their trendier designs in the affordable luxury segment. Shares of Coach are still trading at a discount of nearly 50% from their highs in 2012.

Management has clear plans for a turnaround, though. The company hired Stuart Vevers as new creative director in September 2013, and Coach is trying to reposition itself as a more modern and fashionable brand.

Coach is restructuring its store base, closing unprofitable locations and betting on a modern luxury concept to increase customer traffic. The company closed 56 North American retail locations last quarter, and management is planning to close 70 units during the full year. In the modern luxury segment, the company is planning 100 global renovations and 40 to 50 new openings during fiscal 2015, intending to end the year with 140 to 150 modern luxury stores.

Coach participated in its third New York Fashion Week presentation in February, and management said that the collection received: "Overwhelmingly positive reviews from both the editorial and retail communities," so the company is optimistic on its latest collection.

What you need to watch Investors will be paying close attention to sales figures in the coming earnings release to evaluate if Coach can regain some of the traction it lost among consumers. Wall Street analysts are on average expecting $973.85 million in revenue during the quarter ended in June, a decline of 14% from the same period last year.

During the March-ended quarter, the company reported a similar decline in sales of 15% versus the same period in 2014. Most of the decline in revenues is concentrated in North America, where total sales decreased 24% last quarter due to store closings and reduced promotional activity.

International markets are doing much better, though. Coach reported a 4% increase in international sales adjusted for currency fluctuations in the previous quarter. China is a particularly important country for Coach; sales in this market rose 10% on a constant currency basis and 8% in dollars during the March-endede quarter. The company is also expanding into shoes and men's products, and these categories could be promising drivers over the middle term.

In addition to sales, profit margins can provide remarkably important information about Coach's new strategy. Ideally, investors would like to see rising or at least stable gross profit margins as the company scales back on promotions and moves upward on the pricing scale.

Inventory levels are also particularly relevant for a fashion company in the midst of a turnaround. If management is making the right merchandising decisions, then inventory should move rapidly from the shelves, so inventory in relationship to sales should decline over time.

When it comes to the bottom line, analysts are forecasting $0.29 in earnings per share for the quarter, a considerable decline from $0.59 in the same period last year. Earnings are always relevant, however investors will probably put more attention on what the numbers are saying about the future of the business than on the amount of money Coach gained or lost in a particular quarter.

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Andrs Cardenal owns shares of Coach and Michael Kors Holdings. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach and Michael Kors Holdings. 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.

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