It has been about a month since the last earnings report for Coach, Inc. . Shares have added about 2.4% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Coach Q4 Earnings Beat, Sales Miss, Provides FY18 View
Despite tough retail landscape and volatility in macroeconomic environment, Coach, Inc. posted better-than-expected fourth-quarter fiscal 2017 bottom-line results. The adjusted earnings of 50 cents a share beat the Zacks Consensus Estimate by a penny, thereby resulting in a positive earnings surprise of 2% and marking the 14th straight quarter of earnings beat. The quarterly earnings also increased roughly 11.1% year over year. Lower SG&A expenses and improved operating margin provided cushion to the bottom line.
Net sales came in at $1,133.8 million, down about 1.8% year over year. However, excluding the extra week in fiscal 2016, net sales rose 6% on a reported basis, while 7% on a constant currency basis. Sales growth were hurt by 60 basis points on account of management’s efforts to elevate the Coach brand’s positioning in the North American wholesale channel by lowering promotional events and door closures.
Coach registered positive comparable store sales at its North American segment for the fifth consecutive quarter. The company witnessed healthy growth across directly-operated Europe and Mainland China operations. The company is undergoing a brand transformation and is introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman and Kate Spade & Company is being viewed as a significant step in its efforts toward becoming a multi-brand company.
Management highlighted that net sales for the Coach brand aggregated $1.05 billion, while that of Stuart Weitzman brand totaled $88 million for the quarter. However, we noted that the total sales fell short of the Zacks Consensus Estimate of $1,146 million for the fourth successive quarter.
Behind the Headline
Total North American Coach brand sales came in at $586 million down from $606 million reported in the last year. Excluding the additional week in fiscal 2016, total brand sales jumped 4%, while direct sales rose 5% on a dollar basis and 6% on a constant currency basis. Both North American aggregate and bricks and mortar comparable store sales increased about 4%.
International Coach brand sales came in at $442 million marginally down from $450 million posted in the year-ago period. Excluding the additional week, total sales rose 6% in dollar terms, while 9% on a constant currency basis. Sales in Greater China grew 3% in dollars and 7% in constant currency attributable to double-digit increase and comparable store sales growth in the Mainland, partly offset by continued sluggishness witnessed across Hong Kong and Macau.
Sales in Japan fell 3% in dollar terms and 1% on a constant currency basis. Sales for the rest of the direct operations in Asia witnessed mid-single digits decline in dollars as well as constant currency basis on account of macroeconomic and geopolitical headwinds in Korea. Sales in the directly operated channels in Europe remained sturdy, marching at a double-digit rate.
Consolidated adjusted gross profit declined 3.3% to $756.8 million, whereas gross margin contracted 100 basis points to 66.8%. Adjusted operating income came in at $179.5 million, up 2.7% from the prior-year quarter figure, while operating margin expanded 70 basis points to 15.8%.
During the quarter, Coach opened 1 location and closed 6 locations in North America, thereby taking the count to 419. In Japan, total number of locations remain unchanged at 184. In Greater China, the addition of 4 new locations and the closing of 2 increased the total count to 199. Across Asia (Other), store count increased to 105 owing to the opening of 3 stores and closing of 1 store. In Europe, the store count jumped to 55 following the opening of 9 stores and closing of 1. There were 81 Stuart Weitzman stores at the end of the quarter.
During fiscal 2018, the company intends to close 15 net stores globally for Coach Brand and expects to open 5 net Stuart Weitzman locations and 20–25 net openings for Kate Spade worldwide.
Other Financial Details
Coach ended the quarter with cash, cash equivalents and short-term investments of $3,083.6 million, long-term debt of $1,579.5 million and shareholders' equity of $3,001.9 million.
Net cash from operating activities in the quarter was $324 million, while free cash flow was $233 million. Management incurred capital expenditures of $91 million. The company projects capital expenditures of about $325 million for fiscal 2018.
Management now expects fiscal 2018 revenue to increase approximately 30% year over year to $5.8–$5.9 billion, with low-single digit organic growth and Kate Spade acquisition adding more than $1.2 billion in revenue. The company envisions earnings in the range of $2.35–$2.40 per share, reflecting an increase of approximately 10–12%, comprising low-to-mid-single digit accretion from the Kate Spade buyout.
Coach projects operating income growth in the band of 22–25% on the back of mid-single digit organic growth, Kate Spade buyout and estimated synergies of $30–$35 million. Interest expense is expected to be about $90 million for the fiscal year.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to two lower.
At this time, Coach's stock has a strong Growth Score of A, though it is lagging a lot on the momentum front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for growth investors than value investors.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.