Home-Grown Sales Helped Coach Beat Earnings Expectations

New, lower-priced items, a rebound in the U.S., and growth in China helped Coach (COH) beat Wall Street's expectations for its second fiscal quarter earnings.The leather goods and accessory company reported net income of $241 million, or 75 cents per share, for the quarter ended Dec. 31, up 11% from 67 cents in the same period in 2008. That beat analysts' expectations of 72 cents per share.

Sales also rose 11% to $1.07 billion, with December being the strongest month in the quarter. Coach's direct to consumer sales -- at its own stores -- were up 14% to $934 million, while indirect sales dropped 8% to $134, due mainly to smaller shipments to department stores. Coach has been shifting more sales to its own stores, and retailers controlled inventories tightly this holiday season, especially in big-ticket items and apparel.

The earnings and sales growth was driven mainly by a comeback in positive comparable-store sales in North America, said CEO Lew Frankfort in a statement. Sales rose 16% during the quarter and comparable-store sales rose 3%. Frankfort said the numbers showed the "continued traction of the initiatives we have put in place to adapt to the changed environment."

Coach has diversified to weather the recession by adding lower-priced lines such as its Poppy collection, which has prices about 20% lower on average than other Coach lines, and added more accessory lines and small leather goods to cater to price-bound shoppers. In his statement, Frankfort noted that Coach plans to relaunch Poppy in the spring with new designs.

Overseas, sales in Japan were down 2%, but in China, where four new stores brought Coach's total outlets to 37, sales rose by double-digit percentages, though the company did not announce the figures. Asia, and China in particular, holds a lot of hope for Coach investors, who have seen the stock rise nearly to the $40 target set by most analysts. Growth in those emerging Asian markets could spell additional upside.

Investors and analysts have approved of Coach's strategy during the recession. The stock is rated as a buy by a majority of analysts and has risen from a 52-week low of $11.73 in March 2009 to close at $37.45 ahead of the quarterly report.

Recent positive reports from Tiffany & Co. (TIF) and Burberry Group Plc. (BURBY) have also raised hopes that the improvement in Wall Street's fortunes will spur the luxury market at the high end, while a potential improvement in the larger economy during the second half will bring back the middle-class "aspirational" shopper in the opening price levels.

"We're well positioned for the 'new normal,'" said Frankfort.
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