Coach North American sales sag; shares slump

Wed Jan 23, 2013 5:18pm GMT

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(Reuters) - Coach Inc (COH.N) on Wednesday reported holiday quarter revenue well below Wall Street forecasts, hit by stiff competition in the handbag segment it has long dominated and a tough environment that saw many retailers cut prices to attract shoppers.

The upscale leather-goods maker and retailer also unveiled a plan to become a "head-to-toe" lifestyle brand with a bigger push into footwear, jewelry and clothing as it tries to re-ignite North American sales.

Coach shares fell 15 percent to $51.54 in midday trading, slashing the company's market value by nearly $2.6 billion.

Comparable sales in North America, Coach's biggest market by far, fell 2 percent during the holiday quarter, only the third quarterly decrease in 11 years. The company forecast flat comparable sales in North America in the second half of its fiscal year.

Coach will start a "re-launch" of its shoe section at 170 of its 356 stores in March, and has begun to install shoe "salons" to better showcase its footwear at a few flagship stores.

That will be followed by an increased offering of clothing, watches and jewelry, which Coach already sells, and fancier presentation as part of a rebranding that will be more visible by the 2013 holiday season.

The idea is to broaden its selections and present them better at a time when Coach faces increased competition from fast-growing rivals like Michael Kors Holdings Ltd (KORS.N), privately-held Tory Burch, and Fifth & Pacific Cos Inc's FNP.N kate spade, whose same-store sales rose 27 percent last quarter.

But the rebranding could signal Coach has hit a wall, one analyst said.

"It means management thinks the core (business) can't grow," Morningstar analyst Paul Swinand told Reuters, adding that the strategy was risky because it could dilute the brand, particularly since shoes are not what Coach is best known for.

Despite its reputation as a purveyor of affordable luxury, Coach handbags typically sell for around $300, and the company has struggled to make headway into higher-end items.

"There is a very substantial opportunity in this space over $400 where we are barely participating," Chief Executive Lew Frankfort told analysts on a conference call.

The theory is that the bigger push into footwear will bring in more shoppers and lift handbag sales.

"We see footwear as a real traffic driver," Frankfort said.

TRAFFIC DROP-OFF

Business at both its own full-service stores and factory outlets, which sell less expensive merchandise, was hit by a drop in the number of shoppers visiting malls and outlet centers in North America during the holiday season.

One Coach executive on a call with Wall Street analysts said he was surprised at how much discounting took place at department stores, particularly in December. Macy's Inc (M.N), Nordstrom Inc (JWN.N) and Dillard's Inc (DDS.N) are among the stores that sell Coach products.

But Coach resisted pressure to offer more deals, protecting both its margins and its brand image.

"Our modest growth was highly profitable," Frankfort told Reuters.

Overall revenue in Coach's fiscal second quarter, ended December 29, rose 3.8 percent to $1.5 billion, missing analysts' average forecast for net sales of $1.6 billion, according to Thomson Reuters I/B/E/S. Revenue in Japan, Coach's No. 2 market, fell 2 percent, excluding the impact of a strong yen.

The holiday shopping season was weak for U.S. retailers, with sales rising 3.1 percent in November and December, according to the National Retail Federation, below forecasts.

The season was difficult for retailers up and down the spectrum: Kohl's Corp (KSS.N) had to lower its profit forecast after heavily slashing prices in December, while high-end jeweler Tiffany & Co (TIF.N) reported a drop in sales at its Fifth Avenue flagship store in New York.

For a graphic on Coach and consumer sentiment: link.reuters.com/jyt45t

Despite the weak North American sales, there were bright spots for Coach. In China, still a small market but the cornerstone of Coach's international expansion, sales were up 40 percent in the latest quarter.

Coach said its push to build up its men's business, which includes wallets and briefcases, is paying off, with the company set to have sales in that segment rise 50 percent for the full fiscal year.

Net income in the second quarter was $352.8 million, or $1.23 per share, compared with $347.5 million, or $1.18 a share, a year earlier. Per-share earnings were 5 cents below the average Wall Street estimate.

(Reporting by Phil Wahba in New York; Editing by Maureen Bavdek, Nick Zieminski and John Wallace)

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