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What Coach's Miss Means for Investors

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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.

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Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 24, 2013, at 11:28 PM, wjcoffman wrote:

    How about answering the question posed as the title of the article: "What Coach's Miss Means for Investors?" Poorly written. An assembly of disparate information the best I can is meant to incite panic-like reaction in investors, which is most definitely NOT Foolish!

    Gross margin was steady.

    Operating margin increased.

    Their results mirrored a company that had to discount it's goods while Coach maintained their pricing.

    How did the business stumble? What misstep(s) did management make?

    All this based on one quarter.

    How was this holiday season for other retailers? How does is compare with the same quarter last year? How about the same quarter in a year during a recession?

  • Report this Comment On January 25, 2013, at 8:48 AM, TMFSigma wrote:

    @wjcoffman - Coach stumbled in its biggest market during retail's biggest quarter. If management is right in saying that it was a temporary setback thanks to Hurricane Sandy and the fiscal cliff, then that's no problem. But its important to understand just what a long-term slowdown in growth in the U.S. market would mean. No reason to panic, just stay informed.

    Thanks for the comment!

    -Demitri (TMFSigma)

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