Coach (NYSE:COH) reported both sales and earnings figures above Wall Street forecasts for the quarter ended in September. However, expectations were quite low leading to the report, and sales in North America are still under heavy pressure, so the company is clearly not out of the woods by any means. Besides, management did not provide much visibility regarding the crucial December quarter.
Mixed sales numbers
Sales during the first quarter of fiscal 2015 came in at $1.04 billion, a 10% decline versus $1.15 billion in the same period last year. Coach is closing stores and streamlining operations to reinvigorate the brand, so analysts were already expecting declining sales. The number came in above Wall Street expectations near $1 billion on average for the quarter.
Total sales in North America declined 19%, to $634 million from $778 million in the same quarter during 2013. North American direct sales declined at a similar rate during the quarter, while comparable store sales in the region fell by a worrisome 24%.
Coach has been losing market share versus competitor Michael Kors (NYSE:KORS) at an amazing speed over the last several quarters. In fact, Michael Kors overtook Coach in terms of sales in North America during the June quarter, generating $719 million in sales and a 30% growth rate in the region during the quarter.
Michael Kors is scheduled to report earnings for the September quarter on November 4; however, investors don't need to look at the official numbers to tell that Michael Kors continued gaining share versus Coach in the September period.
Coach is doing considerably better on the international front than in North America. International sales rose 4% to $381 million during the quarter, on a constant currency basis, international sales rose 6%. Sales in China increased 10% on the back of "positive comparable store sales and slower distribution growth."
The company does not provide much detail regarding performance in China; however, there seems to be some kind of deceleration in the country. During the June quarter Coach announced that total sales in China increased at 20%, with comparable sales rising at double-digit rates, so there could be some kind of slowdown in China.
Adjusted gross margin came in at 69.3% of revenues during the quarter, a decline versus 71.8% in the same quarter last year, but not that bad at all when interpreted in the context of a big decline in sales. Coach is cutting back on promotions and discounts, and this seems to be buffering the decline in gross margins to some degree.
Inventory levels declined by 6.2% year over year, from $637.2 million to $597.4 million. While the decline in inventory levels was not as big as the decline in sales, the company is doing a decent job at keeping inventory levels under control.
Reported earnings per share came in at $0.43, while earnings per share adjusted for transformation and restructuring costs were $0.53 during the quarter. This was better than the $0.45 per share forecasted on average by Wall Street analysts.
An uncertain future
Coach is betting on its new creative Director Stuart Vevers to transform the company into a full lifestyle brand and recover the prestige and pricing power it has lost over the last years. Coach´s completely renewed collection reached the stores in September, so the December quarter could be a crucial period in terms of evaluating the company and its chances of making a turnaround in the middle term. Not only because the holiday period is determinant in terms of its impact on overall sales over the year, but also because it will be a big test for Stuart Vevers and his renewed collection.
Unfortunately, while management sounded optimistic about prospects for this transformation, the company did not provide any guidance regarding sales performance over the December quarter. CEO Victor Luis said:
The launch of Stuart's inaugural collection in September in combination with our Spring 2015 New York Fashion Week presentation are driving Coach's fashion credibility and relevance with new and existing customers. Our layered and targeted marketing campaigns are also creating buzz and excitement around the brand.
The bottom line
While the headline numbers were above expectations, sales are still materially declining in North America, and there could be a slowdown in growth in China. It's good to see that management is optimistic regarding the prospects of a turnaround on the back of Coach's new collection and strategy, but the company did not provide any financial guidance for the key December quarter. Coach stock was falling by 5% before the open on Tuesday, so investors seem to be unsatisfied with Coach and its transformation potential.
Andrés Cardenal owns shares of Coach and Michael Kors Holdings. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.