Coach Beats on Both Edges

Despite lingering economic woes, Coach, Inc. ( COH - Analyst Report ) , the designer and marketer of fine accessories and gifts, recently posted better-than-expected second-quarter 2012 results on the back of healthy sales in North America and China.

The quarterly earnings of $1.18 per share beat the Zacks Consensus Estimate of $1.15, and increased 18% from $1.00 earned in the prior-year quarter, buoyed by strong top-line growth.

The New York-based Coach, said that net sales for the quarter came in at $1,448.6 million, up 14.6% from the year-ago quarter, and outpaced the Zacks Consensus Estimate of $1,430 million.

Behind the Headline

Direct-to-consumer sales jumped 17% to $1.28 billion, driven by an 8.8% rise in the North American comparable-store sales and strong growth in the China business with a double-digit rate increase in comparable-store sales. In Japan sales remained flat, excluding foreign currency translation, whereas in dollar terms sales grew 6% when adjusted for a stronger yen. North American sales climbed 15%.

Indirect sales remained flat at $166 million on a comparable basis, affected by the timing of international shipments. International sales remained robust, whereas U.S. department stores sales were even with the prior-year’s holiday period.

The rise in sales was a positive indication for the luxury-goods market, battered by the recent economic upheaval. Coach’s sustained focus on store sales productivity, merchandising, and marketing and strategic pricing have helped it remain afloat in a difficult consumer environment as well as drive comparable-store sales growth. Coach remains optimistic about its dedicated men's stores, and expects the Men’s business to rise twofold to more than $400 million in fiscal 2012 on a global basis.

Gross profit increased 14.2% to $1,045.2 million spurred by top-line growth. However, gross profit margin contracted 20 basis points, but was strong at 72.2%. Adjusted operating income rose 15% to $521.2 million, whereas operating margin expanded 10 basis points to 36%.

Management remains confident of sustaining double-digit growth in both top and bottom lines in fiscal 2012. The company’s long-term growth drivers include expansion of its global distribution model and entry into under-penetrated markets. The company lays more emphasis on globalization and accelerated international distribution growth, especially in Asia.

Management now expects to achieve at least $300 million in sales in China backed by sustained growth momentum it is currently witnessing. As a part of its strategy to directly control certain Asian markets, Coach is now directly operating domestic retail business in Singapore and Taiwan. The company is also under discussion to acquire its Malaysian retail business in July.

Store Update

During the quarter, Coach, the maker of handbags, wallets, shoes and other accessories, opened 5 retail locations and 5 factory stores in North America, taking the total to 350 retail stores and 157 factory stores at the end of the quarter. In Japan, the company opened 6 stores, bringing the total number of locations to 184. In China, an addition of 9 new locations during the quarter took the total to 80.

Other Financial Details

Coach maintains a healthy balance sheet with a significant cash balance and a negligible debt load. The company also has been proactively managing its cash flows by making prudent capital investments and enhancing shareholders’ return. The company’s strong liquidity, positions it to drive future growth.

The company ended the quarter with cash, cash equivalents and short-term investments of $1,085.6 million and total long-term debt of $24 million with shareholders’ equity of $1,868.7 million.

Coach also notified that it bought back approximately 4.8 million shares at a cost of $62.48 per share, aggregating $300 million during the quarter. The company still has $600 million at its disposal under its share repurchase authorization.

Currently, we have a long-term Neutral rating on the stock. Moreover, Coach, which competes with Polo Ralph Lauren Corporation ( RL - Analyst Report ) , holds a Zacks #3 Rank that translates into a short-term Hold recommendation.