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Coach Inc. Shows Progress in Its Turnaround Plan

By Demitri Kalogeropoulos – Updated May 3, 2017 at 4:16PM

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The retailer is on track to pass $500 million of net income this year thanks to rising profit margins and steady sales growth.

This week, Coach (TPR -3.38%) posted a sales decline for its fiscal third quarter. Yet the company also showed solid progress at improving the brand's positioning in a tough market for luxury retailers. Executives kept their full-year profit targets in place, which call for healthy net income growth paired with a slight increase in revenue.

Here's how the headline numbers compared to the prior-year period:

 Metric

Q3 2017 Actuals

Q3 2016 Actuals

Change (YOY)

Revenue

$995 million

$1.03 billion

(4%)

Net income

$122.2 million

$112.5 million

9%

EPS

$0.43

$0.40

8%

Data source: Coach's financial filings. YOY = year over year.

What happened this quarter?

Revenue fell 4%, as expected, after the company reduced its exposure to the more promotional segments of the industry such as department stores. That shift, along with aggressive cost cuts, helped push profitability higher, though.

Luxury handbags and accessories.

Image source: Getty Images.

Here are the key highlights of the quarter:

  • Coach brand sales fell 5% in the key U.S. market, compared to a slight increase last quarter. The company accelerated its pullback from department stores, which pinched growth. Yet comparable-store sales gains held steady at a 3% pace.
  • The international business posted a 4% drop as solid gains in Europe were offset by more mixed results across Japan, China, and Hong Kong.
  • Gross profit fell less on a relative basis than revenue, leading to an almost 2 percentage point jump in margin to 72% of sales.
  • Expenses dove 5% as the company aggressively cut costs. As a result, operating income soared 14% as operating margin improved to 16% of sales from 14% a year ago.
  • Coach posted a solid jump in gross profitability for its Stuart Weitzman brand, but management dedicated extra resources toward supporting its growth and so bottom line profitability fell to 7% of sales from 9%.

What management had to say

"Our solid performance this quarter was very much in line with our expectations and our strategic initiatives. In a volatile and complex global environment," CEO Victor Luis said in a press release. "We delivered continued positive comparable store sales for the Coach brand in North America and gross margin expansion in each segment, while tightly controlling costs," he continued.

Regarding its turnaround plan, executives sounded optimistic that momentum is gathering around their main strategic initiatives. "The traction we've achieved to date on our transformation plan and the success of our integration of Stuart Weitzman give us continued confidence in our direction," Luis explained.

Looking forward

Coach left its full-year sales forecast in place that predicts revenue rising in the low single-digits. Luis and his team still believe they'll achieve operating margin of between 18.5% and 19% for the year thanks mainly to their decision to methodically pull their products from some of the most promotional retailing outlets.

That margin is far from the 30% profitability that Coach enjoyed as recently as fiscal 2013. However, it will be up sharply from the 15% level that investors have been stuck with for the past two fiscal years. And, since sales growth trends appear steady despite the rising selling prices, Coach appears in good shape to hit its target of improving net income to over $500 million -- up double digits from last year's $460 million haul and far above the low point of $402 million it endured in fiscal 2015.

Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Coach. The Motley Fool has a disclosure policy.

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