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Coach, Inc. (COH - Analyst Report) posted better-than-expected third-quarter fiscal 2013 results. The quarterly earnings of 84 cents a share beat the Zacks Consensus Estimate of 81 cents, and surged from 77 cents earned in the prior-year quarter, as demand in North America increased.

The news was welcomed by the market, as the shares of this designer and marketer of fine accessories and gifts soared 12.9% or $6.51 to $57.10 during pre-market trading hours. Coach’s sustained focus on store sales productivity, online sales initiatives, merchandising, marketing and strategic pricing have helped it remain afloat in a difficult consumer environment.

The New York-based Coach said that net sales for the quarter came in at $1,187.6 million, up 7% from the year-ago quarter, and came ahead of the Zacks Consensus Estimate of $1,202 million. On a constant currency basis, sales increased 10%.

Behind the Headline

Total North American sales grew 7% to $792 billion. Direct-to-consumer sales increased 8%, while comparable-store sales inched up 1%. At point-of-sale (POS), North American department stores sales remained marginally above compared with prior-year quarter, whereas shipments into department stores also increased marginally.

International sales rose 6% year-over-year to $382 million. China business sustained its strong performance as sales soared about 40% with a double-digit rate increase in comparable-store sales. International wholesale shipments fell marginally, whereas sales trends across POS remain sturdy. Sales in Japan remained flat, on a constant currency basis, whereas in dollar terms, sales tumbled 14% from the year-ago quarter due to softer yen.

The rise in total 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.

Going forward, the company remains optimistic about its unisex Legacy lifestyle collection, dedicated Men's stores and international growth opportunities to counter the soft consumer scenario. Management expects to attain more than $600 million in sales worldwide from its Men’s business and approximately $425 million in sales in China in fiscal 2013.

Management hinted that they have entered into an agreement to buy their partner’s 50% stake in their operations in the United Kingdom and Europe. The transaction is expected to conclude in July.

Gross profit jumped 8% to $880 million spurred by top-line growth, whereas gross profit margin expanded 35 basis points to 74.1%. Operating income rose 3% to $348 million but operating margin contracted 110 basis points to 29.3%.

Store Update

During the quarter, Coach opened 2 Men’s factory stores, 1 retail store and shuttered 5 locations, thereby taking the total to 191 factory stores and 352 retail stores in North America. In Japan, the company closed 2 outlets bringing the total number of locations at 191.

In China, an addition of 1 new location during the quarter took the total to 118. As a result of the acquisitions of retail businesses in Singapore, Taiwan, Malaysia and Korea, the company now operates 7, 27, 10 and 49 locations, respectively.

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 $928.5 million and total long-term debt of $22.6 million with shareholders’ equity of $2,244 million.

Coach’s Board of Directors raised the annual dividend by 15 cents to $1.35 per share, which is scheduled to be paid to shareholders in Jul 2013.

Other Stocks Worth Considering

Currently, Coach holds a Zacks Rank #4 (Sell). Other stocks worth considering in the textile, apparel, footwear industry are G-III Apparel Group, Ltd. (GIII - Snapshot Report), Ralph Lauren Corporation (RL - Analyst Report) and Hanesbrands Inc. (HBI - Analyst Report) all holding a Zacks Rank #2 (Buy). We expect these stocks to continue with their upbeat performances.

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