Coach's growth in North America cools

(Reuters) - Coach Inc (COH.N) saw the pace of its growth in North America slow in the third quarter as sales at department stores dipped and it eliminated the use of coupons at its factory outlets.

The company's shares fell 4 percent in morning trading.

Sales at its stores open at least a year in North America, still Coach's biggest market by far, rose 6.7 percent. But that compared to 8.8 percent in the previous quarter.

Some of that slowdown came from Coach's new pricing strategy at its factory stores, where it sells products that are often 50 percent less than merchandise at its full service stores.

"The reality is that we could've driven higher comps if we wanted to. But we have a very strong long-term view," Chief Executive Lew Frankfort told analysts on a conference call on Tuesday.

Coach has the pricing power to wean outlet shoppers off of coupons, and in the process lift gross margins, because it alone sells these products, Frankfort said.

Coach's sales at U.S. department stores, which account for 6 percent of company sales, were "modestly" below last year's levels, even as chains like Macy's Inc (M.N) and Nordstrom Inc (JWN.N) saw big gains in total sales in the first months of the year.

Brian Sozzi, chief equities analyst at NBG Production, said the market was unnerved by the slower growth in North America considering the strong increases in overall U.S. luxury spending.

Revenue in the third quarter ended on March 31 rose 16.6 percent to $1.11 billion, just above the $1.10 billion Wall Street analysts were expecting, according to Thomson Reuters I/B/E/S.

Net income was $225 million, or 77 cents per share, compared with $186 million, or 62 cents a share, a year earlier. The results beat Wall Street forecasts by 2 cents per share.

Coach's gross margin rose 1 percentage point to 73.8 percent of sales.

Shares were down $3.01, or 4 percent, to $72.11 in mid-morning trading on the New York Stock Exchange.

FOCUS ON MEN, ASIA

In China, a small but fast-growing market for Coach, sales soared 60 percent and were on pace to hit at least $300 million this year, Coach said. That would represent 6.3 percent of Wall Street's forecast of $4.8 billion for total company revenue.

The company said will buy back its retail business in Malaysia this summer and Korea next fiscal year from local partners, giving it more control over the brand and how to promote it in Asia.

That follows earlier deals in Taiwan this year and Singapore last year. Ralph Lauren Corp (RL.N) has similarly bought back retail operations in Asia from partners in recent years.

The company continues to push its men's business. Frankfort said sales of men's products such as wallets and bags remain on track to double and reach $400 million this year. In the current quarter, Coach plans to beef up its men's offerings at 58 more Coach stores bringing to 100 the number of stores with a men's section.

Coach operates 350 retail stores in North America and 162 factory outlets.

Coach expects its North American's same-store sales growth in the current quarter to be about the same as the third quarter and for gross margin to continue to improve.

Frankfort said that he was confident sales and earnings would continue to rise at double-digit percentage rates, saying that the average Coach client "is being judicious but spending at higher levels than a year ago," Frankfort said.

Coach raised its dividend 33 percent to $1.20 per share.

(Reporting By Phil Wahba; Editing by Maureen Bavdek, Lisa Von Ahn, Dave Zimmerman)