(COH) Coach Beats The Street – Increases Dividend

Despite sluggish recovery in the economy, Coach, Inc. (COH), the designer and marketer of fine accessories and gifts, recently posted better-than-expected third-quarter 2012 results on the back of healthy sales in North America and China. Strong brand image, geographical expansion, and new pricing and promotional policies in North American factory business were also the factor behind the growth.

The quarterly earnings of 77 cents a share beat the Zacks Consensus Estimate by a couple of cents, and increased 24% from 62 cents earned in the prior-year quarter buoyed by strong top-line growth.

The New York based company, Coach, said that net sales for the quarter came in at $1,109 million, up 16.6% from the year-ago quarter, and came ahead of the Zacks Consensus Estimate of $1,101 million.

Behind the Headline

Direct-to-consumer sales jumped 18% to $984 million driven by a 6.7% rise in the North American comparable-store sales and strong growth in the China business with a double-digit rate increase in comparable-store sales. In Japan, sales grew 10%, excluding foreign currency translation, whereas in dollar terms, sales climbed 14%, when adjusted for a stronger yen. Sales in China surged 60%.

Indirect sales jumped 10% to $125 million during the quarter. International sales remained robust at POS, whereas U.S. department stores sales were moderately lower compared with the prior-year period.

The rise in sales was a positive indication for the luxury-goods market, battered by the recent economic upheaval. Coach’s sustained focus on store sales productivity, merchandising, and marketing and strategic pricing have helped it remain afloat in a difficult consumer environment as well as drive comparable-store sales growth.

Coach remains optimistic about its dedicated men’s stores, and expects the Men’s business to rise two fold to more than $400 million in fiscal 2012 on a global basis. Management aims to enhance Men’s collections in 100 retail stores in North America by the end of fiscal 2012, up from 42 at the end of the quarter under review.

Gross profit increased 18% to $818.1 million spurred by top-line growth, whereas gross profit margin increased 100 basis points to 73.8%. Adjusted operating income rose 21% to $337.5 million, whereas operating margin expanded 100 basis points to 30.4%.

Management remains confident of sustaining double-digit growth in both top and bottom lines in fiscal 2012. The company’s long-term growth drivers include expansion of its global distribution model and entry into under-penetrated markets. The company lays more emphasis on globalization and accelerated international distribution growth.

Management now expects to achieve at least $300 million in sales in China backed by sustained growth momentum it is currently witnessing. As a part of its strategy to directly control certain Asian markets, Coach is now directly operating domestic retail businesses in Singapore and Taiwan. The company is also under discussion to acquire its Malaysian retail business in July. Moreover, the company has entered into a deal to take charge of its Korean retail business in the early part of fiscal 2013.

Store Update

During the quarter, Coach, the maker of handbags, wallets, shoes and other accessories, opened 1 retail location and closed another, and opened 5 factory stores, including 2 Men’s stores, taking the total to 350 retail stores and 162 factory stores in North America at the end of the quarter. In Japan, the company opened 3 stores and closed 3 locations, keeping the total number of locations at 184. In China, an addition of 5 new locations during the quarter took the total to 85. As a result of the acquisitions of retail businesses in Singapore and Taiwan, the company now operates 6 and 26 locations, respectively.

Other Financial Details

Coach maintains a healthy balance sheet with a significant cash balance and a negligible debt load. The company also has been proactively managing its cash flows by making prudent capital investments and enhancing shareholders’ return. The company’s strong liquidity, positions it to drive future growth.

The company ended the quarter with cash, cash equivalents and short-term investments of $929.7 million and total long-term debt of $22.6 million with shareholders’ equity of $1,938.9 million.

Coach also notified that it bought back approximately 2.33 million shares at a cost of $73.92 per share, aggregating $172 million during the quarter. The company still has approximately $430 million at its disposal under its share repurchase authorization. The company’s Board of Directors also announced an increase of 33% in annual dividend to $1.20 per share that will be paid to shareholders in July 2012.

Currently, we maintain our long-term “Neutral” recommendation on the stock. However, Coach, which competes with Polo Ralph Lauren Corporation (RL), holds a Zacks #2 Rank that translates into a short-term “Buy” rating, and reflects the company’s optimistic attitude of accomplishing double-digit growth in both top and bottom lines going forward.

COACH INC (COH): Free Stock Analysis Report

RALPH LAUREN CP (RL): Free Stock Analysis Report

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