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Coach Beats Zacks' Expectations

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Amidst sluggish economic recovery, Coach, Inc. , the designer and marketer of fine accessories and gifts, posted better-than-expected first-quarter 2013 results.

The quarterly earnings of 77 cents a share beat the Zacks Consensus Estimate by a couple of cents, and increased 6% from 73 cents earned in the prior-year quarter buoyed by strong top-line growth on the back of healthy comparable-stores sales across North America and China.

The New York-based Coach said that net sales for the quarter came in at $1,161.4 million, up 11% from the year-ago quarter, and came ahead of the Zacks Consensus Estimate of $1,159 million.

Behind the Headline

Total North American sales climbed 8% to $784 million. Direct-to-consumer sales increased 11% driven by comparable-store sales growth of 5.5%. At POS, North American department stores sales remained flat compared with prior-year quarter but shipments into department stores dropped due to lower inventory planning.

International sales surged 15% year-over-year to $362 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 remained robust attributable to sturdy sales trends across POS. Sales in Japan inched up 1%, excluding foreign currency translation, whereas in dollar terms, sales remained in line with the year-ago quarter.

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.

The company remains optimistic about its unisex Legacy lifestyle collection, dedicated men's stores and international growth opportunities to counter the soft consumer scenario.

Gross profit jumped 11% to $845 million spurred by top-line growth; however, gross profit margin remained flat but higher at 72.8%. Operating income rose 3% to $332 million but operating margin contracted 210 basis points to 28.6%.

Management remains confident of sustaining double-digit growth. 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.

As a part of its strategy to directly control certain Asian markets, Coach is now directly operating domestic retail businesses in Singapore and Taiwan. The company also acquired its Malaysian and Korean retail business during the quarter.

Store Update

During the quarter, Coach, the maker of handbags, wallets, shoes and other accessories, opened 5 factory stores, including 3 Men’s stores, taking the total to 174 factory stores in North America. Retail stores count were 354 at the end of the quarter. In Japan, the company opened 1 Men’s factory outlet bringing the total number of locations at 188.

In China, an addition of 8 new locations during the quarter took the total to 104. As a result of the acquisitions of retail businesses in Singapore, Taiwan, Malaysia and Korea, the company now operates 7, 27, 10 and 48 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 $760.8 million and total long-term debt of $23.3 million with shareholders’ equity of $1,994.1 million.

Coach also notified that it bought back approximately 3.1 million shares at a cost of $56.59 per share, aggregating $175 million during the quarter. At the end of the quarter, the company still has approximately $85 million at its disposal under its share repurchase authorization. The company’s Board of Directors also announced a share buyback program of up to $1.5 billion by June 30, 2015.

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

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