Tomorrow is Wednesday, which means that we'll be halfway through the week, children will be full of woe, and Coach (COH +1.06%) will announce its second-quarter results. You can figure out how to cheer that kid up on your own (maybe cake?), while I help you figure out what to expect from the earnings call.
First off, let's look at what Wall Street is expecting. According to Bloomberg, earnings per share are expected to hit $1.29, which is a 9% increase from last year's $1.18. That gain would be a faster push in bottom-line growth than the company managed in its first quarter, when EPS grew 6%. The gain should be assisted by a new $1.5 billion stock repurchasing program, which runs through 2015. But there's still a bit of ground to cover between the current pace of income growth and the prediction. So what could have happened last quarter to make up that ground, and are investors going to be surprised tomorrow?
Bridging the sales gap
Let me diffuse a bit of the tension by saying that Coach has beaten the market's estimates for four quarters in a row now. That should put investors' minds at ease, if only for a bit. The other good piece of news is that Coach has proven that it can easily grow revenue faster than 9%. Last quarter, revenue grew 11% to $1.2 billion. In order to hold on to more of that revenue as income, it looks like the company will have to address its rising costs.
Last quarter, selling and general expenses rose as the company pushed its overseas expansion. Specifically, Coach's new Korean and Malaysian businesses acted as a drain on its resources . That cost basis is going to continue to put pressure on the company for the rest of the year, although the worst should come in the first half. This isn't a surprise for investors, as management announced in the middle of 2012 that fiscal 2013 would be an investment year.
Instead of trying to mitigate costs, investors should be hoping that the company's holiday strategy played out well. Going into the season, Coach had two big components that made up its holiday plan. The first was a marketing push, both in stores and in general. The bigger part of that push was in stores, and focused on the second big component: men.
The men's line
Coach has expanded its men's line over the past year, realizing that if it wants to compete with other high-end brands, such as Michael Kors (KORS +0.10%), it has to offer products to a wider audience. This holiday season, almost every Coach store had window displays and other in-store setups featuring men's accessories and gifts. That's a line that the company didn't have scaled up for Christmas in 2011, and which should bring in a substantial amount of new business.
Looking at Kors investors can get an idea of what the luxury men's segment can mean for a company. While Kors has been slower to introduce men's bags, on its last earnings call management noted that men's clothing accounted for $100 million in sales in the U.S. alone. If Coach achieves that level of success, it would push total revenue up 7% on its own. That's not going to happen overnight, and it won't come as one chunk, but it highlights the value that the men's business can add to Coach.
The bottom line for tomorrow
Coach needs to have had a good holiday season to hit analyst expectations, but it should have no problem doing that. With sales on the rise, and expenses slowing, it should be able to post the 9% increase in EPS that investors need. The sales driver behind that holiday success will likely be the relatively new men's line, with additional income from new international businesses as icing on the cake this quarter.
With four positive earnings surprises under its belt, I'm expecting Coach to once again beat the market's expectations. Last quarter, the company beat forecasts by $0.01 per share, and I expect a similar, low-single-digit win this time around.
