Thanks to strong competition in the U.S. fashion industry, companies like Coach (COH 1.44%), Ralph Lauren (RL +0.88%), and Kate Spade & Company (KATE +0.00%) haven't been able to enjoy high margins over the last few years. As a result, most of these companies are expanding their businesses in international markets, where they can enjoy healthier operating margins.
Third-quarter earnings
In the third quarter, Coach's per-share earnings came in at $0.68, which beat Zacks Consensus Estimate of $0.63. However, earnings were down 19% from last year's comparable quarter. Gross profit fell 11.2% to $781.3 million, while the gross profit margin shrank 300 basis points to 71.1%.
Net sales fell 7% to $1,099.6 million, attributable to lower sales in North American women's bag and accessories business. The shift in Easter holiday and bad weather conditions also had a negative impact on sales.
During the quarter, Coach bought 2.6 million shares worth $175 million at an average price of $47.99 per share. The company can still buy $835 million under its current share repurchase program.
Segment analysis
North America: Total sales for the North American segment dropped 18% to $648 million. Direct-to-consumer sales also declined 18% while comps fell by 21%.
International: International sales rose 14% to $441 million thanks to China, where sales jumped by 25%. Overall, China business generated sales of $540 million with double-digit growth in same-store sales.
What's cooking at Coach?
With Coach doing not so well in North America, it closed 13 stores in the region during the third quarter. However, it continued to expand its footprint internationally. In Mainland China, it opened five net new locations, while in Japan, it launched three new outlets. Two stores were opened in Europe as well.
One bright spot during the quarter was the company's strong performance in its men's category. As a result of high comps growth, the men's segment represented more than 15% of Coach's global sales. For fiscal 2014, the company expects sales of $700 million from this segment, up 20% from prior year. Apart from the men's segment, footwear also contributed substantially in sales, as the company continued to expand its distribution in international markets.
During the New York Fashion Week presentation in February, Coach unveiled Stuart Vevers' inaugural collection, which will be available in stores this September. The collection, which consists of renowned designer's clothes, bags, and shoes, has been designed to maintain a balance between utility and luxury. "One of my proposals for Coach is this balance between utility and luxury," said Vevers. The company expects the new line to do really well as it grabbed a lot of attention during the event.
In Europe, Coach is now targeting more high-end customers, especially in the handbag segment. By focusing on the above $400 price bucket, the company plans to capture a significant portion of the luxury leather bag market. Therefore, Coach's average unit price is constantly increasing. With Stuart Vevers' new product line about to be launched in a few months, this unit price is bound to go even higher.
Industry peers
In the recent quarter, Ralph Lauren posted EPS of $1.68, which represented a 28% increase from the year-ago quarter. However, during the last year, the company's share price has tumbled by more than 6%. For fiscal 2015, it too has given a conservative outlook as it continues to invest on infrastructure; it plans to spend around $400 million to $500 million on capital projects this year. Furthermore, it's also expecting higher advertising and marketing costs, which is why its operating margin is projected to shrink by 75 to 125 basis points.
Kate Spade's first-quarter earnings came in at $0.37 per share, ahead of a loss of $0.44 in the same quarter last year. Net sales also jumped 34% to $328.1 million. The company's brand Kate Spade once again did really well as its sales surged by 54%. Juicy Couture also experienced strong growth while Adelington Design Group's sales declined. Kate Spade recently refinanced its high-yield notes, which are going to save about $20 million in cash interest savings. The company has reaffirmed its EBITDA guidance of $115 million-$125 million.
Final thoughts
Coach's third-quarter results weren't up to the mark as earnings, along with revenue, kept declining. The company's North American business continued to struggle amid intense competition and sluggish economic growth. For this reason, Coach is rightly divesting its business in the region. In contrast to North America, the company's Asian business, especially China, is growing at a rapid pace. Going forward, the Chinese market will fuel Coach's growth. As far as Europe is concerned, it's still too early to say anything about the company's new strategy of targeting the upscale market.
Though Coach is doing a great job in international markets, its North American business casts a shadow of doubt over its future earnings. Considering this and all above discussion, I remain neutral on Coach.
