Coach Sees the Good Times Continuing - TheStreet

Coach Sees the Good Times Continuing

The company exceeds expectations in the fourth quarter and expects to top 2004 estimates.
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Updated from 10:51 a.m. EDT

Handbag maker and retail chain

Coach

(COH)

finished its 2003 fiscal year on a high note and projected another strong year ahead.

The company earned $29.86 million, or 32 cents a share, in the quarter ended June 28. On a per-share basis, Coach's earnings were up more than 68% from the year-ago quarter, when it earned $17.31 million, or 19 cents a share.

Revenue at the New York-based company jumped 35% from its fourth quarter last year to $231.52 million.

The results bested the company's guidance and analysts' expectations.

Analysts surveyed by Thomson First Call were expecting Coach to earn 30 cents a share on sales of $216.94 million. Meanwhile, the company had previously projected that it would earn about 28 cents a share on about $215 million in sales.

For its full fiscal year, Coach earned $146.63 million, or $1.58 a share, on $953.23 million in sales. Those results improved on the previous fiscal year, when the company earned $85.83 million, or 94 cents a share, on revenue of $719.4 million.

Following that performance, the company raised its guidance for its new fiscal year. In its 2004 fiscal year, Coach now expects to earn $1.92 a share on $1.1 billion in sales.

The company had previously estimated that it would earn $1.80 per share on $1.075 billion in sales. Analysts were projecting that Coach would earn $1.85 a share on revenue of $1.081 billion in fiscal 2004.

Coach's fourth-quarter results were driven by strong sales in both of its two main segments: direct-to-consumer and indirect sales.

The company, which operates 156 retail and 76 factory stores, saw its direct-to-consumer sales increase 31.4% to $139.9 million. On a same-store basis, which compares results at like outlets open more than one year, sales increased 21.6% in the quarter.

Coach's indirect business consists largely of sales through its Coach Japan venture. In the quarter, indirect sales grew 41.1% to $91.6 million.

Almost as impressive as the company's revenue growth was its ability to hold down costs in the quarter.

For instance, Coach's gross profit margin, which represents the difference between what it charges customers for its goods and what those goods cost the company to produce, increased 6.7 percentage points to 73.2% of sales.

The appreciation of the yen vs. the dollar helped account for 90 basis points of that difference. Coach Japan buys its products from Coach; the appreciating yen meant that its cost of goods decreased in dollar terms in the quarter.

But Coach also saw improvements in channel mix in the quarter, with increasing sales going through its higher-margin retail stores. Favorable product mix and decreased sourcing costs also helped account for the increase in gross margin, company officials said.

The company also saw an improvement in its operating margins, as it kept costs in check. Sales, general and administrative costs decreased 1.3 percentage points in the quarter to 51.3% of sales.

That improvement came despite a bonus paid to Reed Krakoff (its president and creative director) that cost the company 3 cents a share after taxes. It also came despite increased spending in Japan as Coach expands its presence there.

Operating margins, meanwhile, more than doubled in absolute dollars to $50.8 million. As a portion of sales, operating margins increased by 7.4% points to 21.9%.

Coach officials attributed the company's improving operating results largely to its strong sales.

In recent trading on the New York Stock Exchange, Coach shares were trading down $1.57, or 2.8%, to $53.80. The company's shares are up more than 63% this year.