Coach (NYSE:TPR) stock was rising just after market open Tuesday as investors reacted with a positive tone to the company's earnings report for the fourth quarter of fiscal 2015. Coach is still going through a difficult turnaround process, but the latest earnings report provides encouraging signs for investors.
Sales were not as bad as feared
The company reported net sales of $1 billion during the quarter ended on June 27, 2015, including a $43 million contribution from the May acquisition of luxury shoe brand Stuart Weitzman. The figure represents a decline of 12% from the same quarter last year, but it outperformed expectations for $973 million in total sales from Wall Street analysts.
Sales in North America declined 20% to $556 million, while constant-currency sales in the region fell 19% year over year. North American direct sales also declined 20% on a dollar basis and 19% on a constant-currency basis for the quarter, with comparable-store sales down 19%.
The company continues reducing its store count in North America, from 539 stores in June of last year to 462 locations at the end of June 2015.
International sales fell 5% during the quarter to $392 million. On a constant-currency basis, international revenue increased 3% year over year. Revenue in China rose 5% in U.S. dollars and 4% in constant currency on the back of slower distribution growth and a slight decline in comparable-store sales.
In Japan, sales rose 2% versus the prior year on a constant-currency basis, while U.S. dollar sales declined 15% due to the steep depreciation of the yen. Constant-currency sales for the remaining directly operated businesses in Asia were even with prior year, while Europe remained strong, growing at a double-digit pace.
Margins and earnings
Adjusted gross profit margin was 69% of sales during the quarter, a small decline from 69.4% in the same period last year. The company ended the 2015 fiscal year with inventory of $485 million, including $33 million associated with the acquisition of Stuart Weitzman. This compared to ending inventory for the Coach brand of $526 million at the end of fiscal 2014. This means that inventory declined 8% on a consolidated basis and 14% for the Coach brand.
Net income for the quarter totaled $85 million, with adjusted earnings per diluted share of $0.31. Wall Street analysts were on average expecting $0.29 for the quarter, so the number came in ahead of expectations.
One of the biggest positives in the earnings report is that Coach is expecting stand-alone brand revenues during next year to increase by low-single digits in constant currency. This is consistent with previous guidance, and it signals that the company may be finally turning the corner when it comes to sales.
Gross margin for the Coach brand is projected to be in the area of 70% on a constant-currency basis, and Coach brand operating margin for fiscal 2016 is currently estimated to be in the mid-to-high teens. This means that profit margins could remain under pressure, so earnings will not necessarily find a bottom next year.
Still, turning sales around is a necessary first step when it comes to delivering sustainable earnings growth, so positive sales guidance is a major plus when evaluating Coach's potential over the middle term.
CEO Victor Luis sounded quite optimistic in the press release about the company's performance during fiscal 2015 and chances for a sustained turnaround in 2016:
We are pleased with our fourth quarter and full year progress on the comprehensive plan we laid out a year ago to reinvigorate our brand and business. Our execution of these strategic initiatives and resulting performance has been consistent with our expectations and underscores our confidence in the path we've chosen. As we moved through Fiscal 2015, we drove sequential improvement in our North America bricks and mortar business while dramatically reducing the number of promotional impressions in the marketplace against a backdrop of heightened promotional activity. In addition, our international businesses posted moderate growth on a constant currency basis, highlighted by a double-digit increase in Europe and strong growth in China, driven entirely by the Mainland, as sales approached $600 million.
The bar was quite low for Coach leading to the earnings report, and the company is not definitively out of the woods yet. However, the latest earnings report, coupled with encouraging guidance for 2016, seems to indicate that Coach keeps moving in the right direction.