*Updated from 8:30 a.m. to include conference call comments.
Some will see the positive first fiscal quarter results as proof of a budding transformation of a storied brand in the mall. Others see only a company still in turmoil due to competition from Michael Kors (KORS) , Kate Spade (KATE) and Polo Ralph Lauren (RL) - Get Report . A new, unfortunate wrinkle came today in the form of waning sales growth in key Asian markets, such as Hong Kong.
Coach reported net sales of $1.04 billion, beating the $1.01 billion Bloomberg consensus. Earnings per share also topped estimates, coming at 53 cents a share versus 46 cents a share. "Our first quarter results were in line with our expectations and our annual guidance," said Coach's CEO Victor Luis in explaining the performance.
The message for investors is that the more-fashionable products of new creative director Stuart Vevers that trickled into stores in September, the closure of underperforming retail stores and fewer outlet promotions have stopped the surprising plunges in Coach's sales and earnings that has pressured the stock throughout 2014.
Coach noted on its earnings call that it had "even stronger, positive" same-store sales growth for products priced above $400 compared to trends in the last 12 months as it flowed in more appealing merchandise to remodeled department store and retail store locations.
Luis said, "We are seeing better performance at doors (department store shops and retail stores) with a full and partial remodel." Coach intends to remodel 150 of its mall-based retail stores in fiscal year 2015, accompanied by 140 refreshes of the presentations at department stores. The visual upgrades at department stores boast digital walls that display Coach products and improved racks, as well as shop managers that help to guide a person through a purchase.
The company ultimately stressed it's seeing a "new" customer to the Coach brand, one that is better in tune with the latest trends in apparel and accessories. In other words, Coach would appear to be the next great retail turnaround story.
Still, Wall Street remained unconvinced, sending Coach shares lower by 6.5% in midday trading. The reason for the Street's lack of confidence -- the underlying data.
Coach's better-than-anticipated quarter, relative to Wall Street's subdued expectations, still showed declining sales and plunging profit margins, underscoring the entrenched competitive threats in the mall and within department stores like Macy's (M) - Get Report and Lord & Taylor.
Coach's adjusted gross margin fell 258 basis points year-over-year to 69.25%, a large majority of the decline stemming from costs to improve product quality and a pull back on discounts at outlets that harmed traffic. The result followed a 360-basis-point drop year-over-year in the fourth fiscal quarter. North American comparable store sales declined 24.4%, a faster pace of decline than the 17% delivered in the fourth quarter. Coach blamed reduced discounting at its outlets as the primary reason for the weak comparable store sales, adding on the call that "the overall outlet environment was definitely more promotional."
But store traffic and conversion at Coach's full-price retail stores was once again lower, said the company on the earnings call. Wall Street expected a 25.5% fall in same-store sales.
Coach remains on track to close 70 underperforming retail stores "shortly after" the holidays.
On the earnings call, Coach reiterated that it projects full-year North American same-store sales to decline by a "mid to high 20s" percentage, gross profit margins in a range of 69% to 70%, and a "high-teens" percentage operating margin.