Coach Continues to Fight for Customers

With one solid earnings report, Coach (NYSE: COH  ) managed to almost pull its stock back to its 2013 starting position. Today, the company announced that earnings per share had risen 9% to $0.84. Analysts had been expecting $0.80 per share in earnings, and sales of $1.2 billion, which was in line with the company's revenue for last quarter.

The good news was tempered by the comparable sales data, unfortunately. North American comparable sales increased just 1%, with international revenue up a scant 6%. China did offer some strength, though, with comparables "rising at a double-digit rate " -- which is a pretty broad range.

Coach's foot traffic problem
The clear issue for Coach is still its ability to get people through the door. With comparable sales just hanging on, the brand is walking a fine line between increasing sales and over-discounting merchandise. Last quarter, operating margin slipped slightly, while gross margin pushed up just a bit to a healthy 74%. It seems like the company is probably doing a fine job of walking the line right now, but things could turn quickly.

Four years ago, the financial crisis was still a new concern, and Coach didn't have the capability to handle the change in customer sentiment. Gross margin for the same quarter fell 4 percentage points as the company desperately tried to compete on price.

Over the last few years, Coach has made great strides toward sustainable growth, and the cost-cutting mentality is still in place. Unfortunately, sometimes that means Coach is focusing on only two of the three things it needs to. In the previous quarter, the company spent too much time on its men's and international businesses, and North American handbags suffered, as a result.

Expansion continues at Coach
All three of those businesses had a good run in this most recent quarter. The men's business is on track to double its position from last year, up to $600 million in the fiscal year. Internationally, Coach opened its 100th store in China, and has announced a deal to buy out a third party with 50% interest in some of the company's European locations.

All of these initiatives have to be running with the stiff competition coming from Michael Kors (NYSE: KORS  ) in mind. Kors posted incredible comparable-sales growth across its locations, and is the current hot name in ready-to-wear. But Coach still has a chance, and Kors' fall line has received mixed reviews, which may come back to hurt investors later in the year. But for now, it's the brand that Coach has to fight in the malls of America and China.

That Coach was able to turn in a solid quarter speaks to management's refocusing on multitasking, and it bodes well for the next quarter. As I've said before, the combination of the company's brand strength and its international push make it an excellent long-term stock. All it needs to do is crack its foot traffic problem, and Coach will be ready to soar.

Michael Kors is one of today's hottest high-end fashion brands, and that's translated into one of the best-performing stocks in retail -- since its debut on the market in late 2011, the share price has more than doubled. But with all that growth, has the stock finally become too expensive, or is there still room left to run? The Motley Fool's premium report on Michael Kors gives investors all the information they need to make the right decision. We cover the key must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.


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