Coach Inc Earnings: First Quarter Sees Minor Improvements Among Continued Declines

The markets are giving handbag maker Coach the benefit of the doubt, bidding up its stock following an earnings report that showed improvement over previous quarters.

Handbag maker Coach once again beat Wall Street earnings forecasts, but just like last time, it was another quarter of falling sales and profits, suggesting only that analysts have set the bar that low. CEO Victor Luis may mouth platitudes about being "excited to see our brand momentum building as we execute on our transformation," but it's clear the modern luxury company remains trapped in a downward spiral.

Here are the highlights from the most recent quarterly report:

  • Net sales of $1.03 billion, down almost 1% year-over-year.
  • Net income of $96.4 million, a 19% year-over-year decline.
  • Adjusted earnings per share of $0.41 versus $0.53 in the year-ago quarter.
  • Comparable-store sales were down 9.5% compared to the year-ago quarter.

Glimmers of hopeThere were some positive developments to be pulled from the report, with the pace of falling sales decelerating from prior quarters, particularly North American comparable-store sales, which, for the first time in a long time, did not fall by double-digit percentages.

Indeed, analysts had expected Coach to produce $1.04 billion in revenue and $0.40 per share in profits, so while the decline did seem to slow this quarter, it is still a worrisome situation for investors.

The markets, however, seemed to like the report, boosting its stock more than 4% the day of the release. However, Coach has seen its shares bid up before after seemingly positive results, only to sink again in the weeks afterward as the reality of its weak position sunk in.

Strong dollar woesBecause Coach derives nearly half of its revenues from outside North America, the impact of a strong dollar on its performance is going to be a continuing struggle.

  • Against the Chinese reminbi, sales were up 2%, but 3% higher in constant currency.
  • In Japan, sales were up 6% in yen, but down 6% in U.S. dollars.
  • Europe was said to be very strong, growing at a double-digit pace in both total and comparable-store sales.

Its domestic operations, which represented 54% of total sales, still appear weak, even if somewhat less so. Direct sales dropped 11% on a constant currency basis as Internet sales weighed on performance. Coach offered fewer sales online, and department store sales were still plunging by mid-teens rates, albeit it was better than the mid-20s declines it suffered last quarter.

Of course, the first fiscal quarter is one of its strongest of the year, behind only the second quarter, which benefits from the Christmas holiday. That one of its best periods is still appreciably weak heading into its peak sales season suggests investors should expect the next quarter to still be lower than a year ago.

At some point, Coach will reach bottom, but it doesn't appear to have found it just yet.

Don't discount the power of a saleThe quarterly results indicate that while the consumer is slowly coming back to Coach -- or rather, is not fleeing the handbag maker as quickly -- it's clear that having shoppers accustomed to receiving discounts for so long, it's hard to wean them off those expectations. The higher prices should eventually bolster the bottom line, although it will be at a diminished point from where it is today.

The handbag maker continues to invest in its products and stores, and those that have been upgraded are generating positive comps, an important retail metric because it strips out growth achieved by opening new stores. The addition of Stuart Weitzman also looks like it's paying off.

Kicking it higherIn the first quarter, the luxury shoe brand added $87.5 million in revenue and $15.1 million in operating profit, and Coach says it expects it to contribute $335 million for the full year.

Management maintained the guidance it provided at the end of its fiscal fourth quarter when it said it expected revenue to grow by low single-digit rates, with operating margins in the mid to high teens.

That includes the fact that fiscal year 2016 includes an extra selling week, which the handbag maker says will add $75 to $80 million in revenue and $0.06 in earnings per share, which could represent all of the gains Coach will experience.

Coach's rate of decline is slowing, which is an improvement, but it can hardly be deemed "momentum", and investors should still use caution.

The article Coach Inc Earnings: First Quarter Sees Minor Improvements Among Continued Declines originally appeared on

Rich Duprey 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.

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