Coach (NYSE: COH ) came up short this quarter.
The company turned in $1.23 a share in profits, just shy of the $1.28 analysts had been expecting. Revenue at the luxury retailer was also surprisingly light. Sales came in at $1.5 billion, about $100 million below Street forecasts.
A $0.05 miss might sound like small potatoes. Sure, Coach has a history of beating expectations. But even the best businesses stumble from time to time. Yet this miss is important because of what it says about Coach's growth opportunities, particularly in the U.S. market.
It's not just that the U.S. kicks in two-thirds of the company's revenue; the region is also critical to Coach's expansion plans. Coach closed the quarter with 356 stores there, after opening just two new locations. Management has much bigger long-term plans for the market, though. They think it can ultimately support 500 retail locations, which equates to about a 30% larger footprint. That ambitious outlook had the company expecting to open 25 new U.S. locations in fiscal 2013.
But that's looking like a stretch now. Revenue in the North American region grew by just 1% last quarter, including a 2% drop in comparable store sales. With comps falling, Coach will have to focus on returning existing stores to growth before aggressively expanding into new locations.
That will put more pressure on international sales growth to pick up the slack. Global sales definitely helped this past quarter. Revenue from China grew at a 40% clip. While North America contributed just $10 million to sales growth, international sales rose by a hefty $43 million.
Unfortunately for Coach, those results mirrored the holiday performance of Tiffany (NYSE: TIF ) , another luxury brand that happens to be struggling right now. Tiffany turned in surprisingly weak sales in its flagship U.S. locations while pulling in more revenue growth from overseas, particularly China.
One path that Coach refused to follow Tiffany down was in discounting. Despite seeing increased promotional activity from competitors, Coach held the line on prices this quarter. As a result, gross margin was steady at 72.2%. And operating margin actually improved, rising to 35% from the 34.6% Coach booked last year.
That profitability, along with strong international sales growth, was a bright spot in the earnings report. And if the troubles in the U.S were just "near-term challenges," as CEO Lew Frankfort says, then Coach's ambitious growth plans aren't at risk. But Coach can't get there without solid expansion in the U.S, something that was missing from its holiday quarter.
To learn about two retailers with especially good prospects, we invite you to take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it right now by clicking here.