Coach reported fiscal fourth-quarter earnings of 59 cents a share, topping forecasts by 6 cents. Investors cheered the higher the higher-than-expected earnings, lifting the stock by 4% to $35.69 in early afternoon trading on Tuesday. Investors focused on these two positives:
- Operating income was $231 million in the fourth quarter ahead of estimates of $203.5 million as compiled by Bloomberg.
- Gross margin in the quarter was 69.4%, topping analysts' estimates by 100 basis points.
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On the earnings call, Coach CEO Victor Luis said the company had sales success with handbags priced at more than $400, which represented 21% of total handbag sales vs. 16% last year. The company also hyped that it will have 150 remodeled locations in department stores by the end of fiscal 2015, its 70 store closures will be concluded by the first half of fiscal 2015, and guidance remains the same as previously announced in July.
But while Coach tries to sell investors on its turnaround, which is rooted in elevating the brand's perception in the market by reducing promotions online and at outlets, and introducing a fresh "modern luxury" assortment, there were at least three numbers in the earnings that rendered management's commentary overly optimistic.
Essentially, Coach may have set up investors for disappointment if first fiscal-quarter sales and profit margins don't show a sequential rebound. Given the perception by cusotmers that the Coach brand isn't a luxury experience, the company's return to relevance won't be an easy undertaking.
By the Numbers
Same-store sales fell 17% in the quarter due to weak store traffic, following a 1.7% decline a year ago. Competitor Michael Kors (KORS) saw same-store sales increase in its latest quarter. The continued disparity between Coach's same-store sales and those of Michael Kors demonstrate the popularity of the Kors brand and the the uphill battle Coach faces in trying to regain lost customers.
Although non-GAAP gross margin surpassed consensus forecasts at 69.4%, it declined 360 bps during the quarter year over year. Michael Kors' gross margin increased 20 basis points in the quarter to 62.2% even as the company used more markdowns to drive sales.
Inventory rose 0.2% year over year. Coach has a way to go in cleaning up its inventory levels at department stores and its outlets, suggesting risk to the company's fiscal 2015 gross margin guidance of 69% to 70% as it utilizes aggressive markdowns.