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Coach Bags Another Quarter

Rob Lenihan

Investors backed off from Coach(COH Quote - Cramer on COH - Stock Picks) Tuesday as the luxury-goods company beat fiscal third-quarter targets but announced the closing of its corporate accounts business.

Shares were slumping $3.36, or 6.3%, to $49.99 in recent trading.

The New York-based handbag maker made $147 million, or 39 cents a share, from continuing operations for the quarter ended March 31, up from the year-ago $102 million, or 26 cents a share. Sales jumped 30% from a year ago to $625 million. Operating margin rose to 36.2% in the latest quarter from 32% a year ago.

Analysts polled by Thomson first call were looking for a 38-cent profit on sales of $617 million.

"Our third-quarter results exceeded our expectations, driven by the overall strength of the brand, great product performance and continued expansion in the North American handbag and small leather goods market," CEO Lew Frankfort said in a statement.

As always, bags and women's accessories drove the company's performance, said Frankfort, who added that the company was "delighted" with the reception for its new Coach fragrance, which launched in early March and accounted for more than 3% of the company's retail sales in that period.

The earnings figures exclude the results of Coach's corporate accounts business, which the company wound up during the quarter "in order to better control the location and image of the brand where Coach product is sold."

"Simply put," Frankfort said during a conference call with analysts, "our goal is to curtail the diversion of our products into non-image-enhancing environments, such as the warehouse retailers and the discount chains."

Frankfort told analysts the problems with the corporate accounts business had become a brand integrity issue, with Coach products turning up for sale at such bulk discount retailers as Costco.

Looking ahead, the company expects to make $1.67 a share for the year on sales of $2.6 billion, compared with Wall Street's expectation of $1.72 a share. Coach said it believes the Wall Street consensus includes a dime a share from the discontinued corporate accounts business, putting the company's target a nickel above analysts' expectations. For 2008, Coach sees a profit of $2.02 a share on sales of $3.1 billion.

Brian Sozzi, equity research analyst at Wall Street Strategies, said the drop in the company's stock was due in part to confusion over the guidance. "We're looking at a stock that has been up substantially over the past 12 months," he said. "If you drill down deeper, you still have a brand that's been growing by leaps and bounds."

During the quarter, the company opened seven U.S. retail stores, bringing the total to 244 retail stores and 90 factory stores as of March 3. Frankfort said the company was looking to add 40 new stores a year in North America over the next few years for a total of about 500 stores.

Other News: Target, Federated

In other retail news, Target(TGT Quote - Cramer on TGT - Stock Picks) recently slipped $1.43, or 2.3%, to $60 after warning of slow April sales and lowering revenue projections for the month. The retailer said it expected same-store sales for the March-April time period to increase 3% to 4%, compared with the company's earlier expectations of 4% to 6%.

Target said that it remained comfortable that first-quarter earnings-per-share growth would be consistent with its earlier full-year guidance of a mid- to high-teen percentage increase.

Federated Department Stores(FDS Quote - Cramer on FDS - Stock Picks) was also off slightly. Chairman and CEO Terry Lundgren said during a meeting with investors that the company remains comfortable with the full-year sales and earnings guidance previously provided for 2007.

This includes an increase in same-store sales, or sales at stores open at least a year, of 2% to 3.5%, total sales of $27.1 billion to $27.6 billion and earnings of $2.45 to $2.60 a share, excluding any May Company merger integration costs. Federated, the parent company of Macy's, acquired May Company in 2005. Shares were off 33 cents to $44.54.