Is Coach losing its brand cachet?
NEW YORK (MarketWatch) -- Shares of upscale handbag designer
Its results also sparked worry about demand
for other retailers of accessories and other luxury goods.
Coach (COH) dropped 19% to $49.33, making it the biggest S&P 500 decliner. The percentage drop was the stock's steepest since September 2001.
Jewelry retailer
Coach customers also didn't fare much better:
Michael Kors Holdings (KORS) , one of Coach's top rivals, dipped 0.5%.
Coach was cut to hold from buy at Jefferies and to neutral from overweight by Piper Jaffray.
Investors 'spooked'
North American same-store sales in the quarter rose 1.7%, below the average analyst estimate of a 6.5% increase.
"Investors are concerned about the [Coach] brand," said Lazard Capital Markets analyst Jennifer Davis in an interview. "They are concerned they are losing share to Michael Kors. [The sales miss] spooked a lot of investors."
Still, Davis affirmed her buy rating on Coach and says that the stock is "over-punished" since the brand still resonates with consumers. Its latest Legacy collection -- the company's biggest launch in years and taking design cues from its archives -- will generate demand, she said.
Coach said it's been pleased with the consumer response in the first 10 days of the launch.
Davis said the company also had too much of a neutral tone assortment early in the quarter, missing the colored fashion trend. She said Coach has rectified that with the Legacy introduction.
Profit for the fourth quarter ended June 30 increased 24% to $251 million, or 86 cents a share, from $202 million, or 68 cents, a year earlier. Sales rose 12% to $1.16 billion. Profit beat the consensus estimate in a FactSet survey by 1 cent a share. Revenue missed the average figure of $1.2 billion.
Painful coupon lesson
At the center of the sales shortfall: A decision to do away with coupons in January at its North American discount factory outlets hurt traffic and sales, leading the company to reinstate them in late June.
Coach, which didn't break down its sales between factory and retail, said its full-priced locations are still tracking in line with expectations. International sales also didn't show signs of slowing, the company said.
Davis at Lazard estimated annual sales at the company's North American factory outlets at $2 billion, twice the size of its full-priced counterparts. Its factory outlets generate more profit margin than sales at full-priced stores, analysts said.
Analyst John Kernan at Cowen & Co. estimated that comparable sales at factory outlets likely declined by a high-single-digit percent.
"Over the fourth quarter, the economic backdrop in the U.S. clearly softened, as consumer confidence and sentiment declined," Coach Chief Executive Lew Frankfort said.
"An increasingly promotional environment in North America led to slower growth than expected in factory stores, which was entirely responsible for the change in the overall retail (comparable sales) trend from the prior quarter."
Share loss?
A decline in sales to the company's North American department-store customers also raised concerns that Coach may be losing share to the likes of Michael Kors and Tory Burch, analysts said.
"Although Coach has maintained a dominant position in the aspirational handbag category for several years, we see competition rising more recently," said analyst Randal Konik at Jefferies, adding Michael Kors has been "an increasing threat."
He said Coach is losing some share to the designer label, which he said had posted same-store sales of over 30% consistently, compared to Coach's typical high-single-digit sales gain, which the analyst said is slowing.
Investors also are concerned about Coach tagging fiscal 2013 as an investment year, during which it will beef up its online and digital presence as well as speed up the acquisitions of distributors in Asia, including in Malaysia and South Korea.
It's also been aggressively expanding in sales to men and in emerging luxury markets including China, where fourth-quarter sales rose about 60% to a total of more than $300 million.
"Investors are often wary of creating or adding to positions early on in those investment cycles, thus causing pressure on shares or keeping the stock range-bound at best," said Piper Jaffray analyst Neely Tamminga.
A year of investment is "the right move but a speed bump for [the] shares. We are needing to clearly distinguish between Coach the company versus COH the stock."
Details of the Q4 report
Fourth-quarter gross margin widened to 72.6% from 71.8%, helped by cost improvement, while selling, general and administrative expenses fell to 40.5% of sales from 41.5%.
Direct-to-consumer sales, which now include Singapore and Taiwan, rose 13% to $1.05 billion.
Sales in China were up at a double-digit rate on a comparable basis. In Japan, sales rose 16% excluding currency impact.
Sales to department stores and other customers were flat at $108 million on a comparable basis. Higher international wholesale shipments were offset by declines to U.S. department stores. At the department stores in the U.S., retail sales to consumers also decreased "moderately," the company said.
Coach said it still plans to increase both sales and profit at double-digit-percent rates over its planning horizon, even though North American sales are projected to rise at a slower pace, low- to mid-single digits.
International acquisitions will lead expenses to rise at least 1.5 percentage points.
"We are mindful of balancing the impact of the muted consumer environment in North America and a softening global macroeconomic outlook with our optimism around the launch of Legacy, men's and the strong international expansion opportunities for Coach," Frankfort said.
.
, 
, 
, Copyright ©2013. All rights reserved.