Handbag maker Coach (COH 2.10%) hasn't yet reached bottom, but there does seem to be a light at the end of the tunnel. Its fiscal first-quarter earnings report showed sales were still falling, comparables remained sharply lower, and profits continued to decline, but all of those indicators were less bad than they were the quarter before as well as the year-ago period.
Currency is still wreaking havoc with the numbers, but Coach's management thinks these are five things investors need to know about the business.
It's no longer a contest between leather or logo, as the latter is seen as being on a long-term decline and Coach is diminishing its impact across its stores.
1. Our logo business is a lost cause.
Coach has reduced its once famous double-C logo business to just 5% of sales at its full-price stores. A year ago it was at 6%, and the year before that it was 8%. In outlet stores, the logo business stands at 30% now, compared with 40% a year ago.
Coach has learned, just as others have, that customers no longer want to be walking sandwich boards giving away free advertising space. But that plays to Coach's strength in leather goods, where it's investing more, including adding Genius Bar-like counters where customers can get things monogrammed.
North American region president Andre Cohen acknowledged logo's ebbing contribution "while leather has been comping positive in outlet, and that's something that I think is very consistent with Coach's core equities."
2. Our store remodels let us shine.
As became clear last quarter, the luxury makeover Coach is giving its stores continues to drive higher sales beyond what's been seen at those locations that haven't gotten the treatment. It's renovated or opened more than 30 stores in the new format, anticipates converting 50 store-in-store shops to the modern luxury format, and expects a total of 40% of its stores to be upscaled by the end of the year.
CEO Victor Luis said, "Our modern luxury stores globally and across channels are performing well, and we're especially pleased with the ongoing positive comps we're generating in the North American retail stores which have been renovated."
Coach stores are getting a luxury makeover beyond just a coat of paint and new carpeting. The handbag maker says it spurs more sales when it goes all out and upgrades fixtures, too.
3. But we still need some low-priced stuff to sell.
The $400-and-above price point held its level of penetration (or the number of consumers who buy or use a particular product divided by the market size), saw another round of positive comps on a unit basis, and represented nearly 30% of handbag sales, in line with last year. But Coach seems to realize it had left money on the table in the $300-and-below price bracket by focusing so intently on the higher price points.
This quarter it added more product to the low-end range and found it enjoyed a positive comp that it's looking to carry through the Christmas shopping season.
Said Cohen, "We've actually filled gaps in the [below-$300] assortment, so there we've seen a significant increase and we think that bodes really well actually for the holidays where we had gaps as we know last year."
4. We look better because we're lapping some really ugly numbers.
Of course, all these better numbers are happening because last year was such a horrible one for the handbag maker. Comparable sales were down 9.5% this quarter, the first time in over a year they've been down in single digits. If it happened at another place and time, that would've been a terrible result, but because last year they were down 24% it actually looks pretty good.
CEO Luis says, "Overall, our results underscore our confidence that the cumulative impact of our actions will result in a return to top-line growth in FY16 and positive North American comps by the end of the year."
5. And we're confident we can still make a mark in shoes.
The addition of Stuart Weitzman continues to spin off benefits and cost savings, adding $87.5 million in sales and producing gross margins of almost 58% even though it also reduced net income by $17 million, or $0.06 per share. But there is a big expansion ramp ahead of the brand, particularly in Asia, where it has virtually no presence now, and Coach anticipates opening 10 new stores dedicated to Stuart Weitzman in 2016.
The shoemaker commands a lower profit margin than does the Coach brand, so it will drag down the company as a whole, pressuring gross margins by 80 basis points and operating margins by 50. But Luis says Coach has an opportunity to steal "market share within the fragmented men's and women's $27 billion global premium footwear category, which we estimate will grow at a mid-single-digit pace over our planning horizon."
What it means for investors
A corporate transformation takes time, and Coach has been wandering in the wilderness for several years now as it remakes itself into a modern luxury retailer. The journey isn't over yet, and it's still fraught with risk.
Coach stock got an initial bounce from its earnings report, but it pulled back quickly, as the challenges still looming before it remained in place. It was a less bad outcome this quarter, but that still means it wasn't very good.
