Coach (NYSE:COH) is down by more than 35% year to date, as the handbags and accessories company is facing a remarkably challenging scenario. Coach has lost its touch with consumers lately, and competitor Michael Kors (NYSE:KORS) is clearly gaining market share versus Coach. However, management is quite optimistic on the prospects for a turnaround as the company refreshes its brand and launches its renewed fall collection.
Coach is scheduled to report earnings for the first quarter of fiscal 2015 Tuesday, Oct. 28, and the coming earnings report could be particularly important when evaluating the company and its prospects for a turnaround.
Coach reported a worrisome decline of 16% in total sales in North America during the quarter ended on June, to $691 million from $825 million, while comparable-store sales fell 15% in this key market. Performance in North America is already quite dismal on its own merits, and it looks even worse when compared versus competitor Michael Kors.
For the June quarter, Michael Kors reported a 30% sales increase in North America, reaching $719 million and displacing Coach as the market leader. In addition, Michael Kors delivered a big increase of 18.7% in comparable-store sales in the region, so the trend is clearly against Coach when it comes to consumer demand.
Things are better for Coach in international markets, though; global sales increased 7% during the June quarter to $414. On a constant currency basis, international sales rose 9% for the quarter. China is a particularly promising market for the company, total sales increased 20% and comparable store sales grew at a double-digit rate in the country during the June quarter.
Still, healthy international growth will hardly be enough to compensate for the big declines in North America, so Coach needs to turn sales around in this critical market if it's going to make material improvements in overall financial performance.
The company hired Stuart Vevers as its new creative director in September of last year, and he is trying to transform Coach from an accessories business to a full lifestyle brand. Management is quite optimistic on the prospects for a turnaround on the back of Stuart Vevers' new collection this fall. In the words of CEO Victor Luis:
As we look to FY15, we're investing to achieve long-term sustainable growth and a return to best-in-class profitability over our planning horizon. We're particularly excited about the replatforming of our brand with the launch of Stuart's first collection starting this fall.
What you need to watch
Wall Street analysts are on average forecasting $1.01 billion in revenues during the first quarter of fiscal 2015, this would represent a decline of 12% versus $1.15 billion in the same period last year. Total revenues are expected to remain under pressure as Coach is closing stores to streamline operations, but it would be nice to see some sign of stabilization in same-store sales in North America, as this could be indicating that the company is moving in the right direction in terms of repositioning the brand.
Management is planning to open 10 net new stores in China during fiscal 2015, and it expects to achieve sales in the neighborhood of $600 million in the country during the full year, so investors may want to keep an eye on the company's performance in this valuable growth market in the coming earnings release.
Importantly, any kind of sales guidance regarding the key December quarter could be even more important than performance in the September quarter. The holiday quarter is remarkably important for a fashion retailer like Coach in terms of its impact on the overall sales figures for the year.
Besides, Stuart Vevers' new collection is available in the stores since September, so the December quarter will be the first full quarter including sales from the new collection, and this means it could be crucial in terms of analyzing the company's ability to get back on track.
Investors would also like to see gross margins holding on acceptably well in the face of declining total sales, as this would be indicating that Coach is regaining some of its pricing power. In addition, inventory levels remaining under control would signal that the company is making the right merchandising decisions and products are moving rapidly from the shelves.
Wall Street analysts are on average forecasting earnings per share of $0.45 during the quarter, a big decline versus $0.77 per share in the same period last year.
It's not just about China
Stuart Vevers' new fall collection is Coach's big bet when it comes to regaining traction in North America, so investors may want to keep their eyes focused on how this collection is performing. This will not only have a big impact on the company's financial performance during the crucial holiday period, but it will also say a lot about Coach's ability to recover brand power and reignite growth in the middle term.
Andrés Cardenal owns shares of Coach and Michael Kors Holdings. The Motley Fool recommends Coach, Michael Kors Holdings, and Nike. The Motley Fool owns shares of Coach, Michael Kors Holdings, and Nike. 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.