Coach Inc: Feeling the Holiday Blues

Jan. 28, 2009
With consumer spending down this season, apparel maker sees quarterly profits fall.

Historically, the holidays are a good time for consumer-driven manufacturers to make up for any missed opportunities that may have slipped by during the year. Not surprisingly, this season came up a little short as many consumers dramatically curbed their spending as economic conditions worsen.

While the trend left high-end apparel and accessories maker Coach Inc. with a 14% drop in second-quarter profits over last year, the company's chairman and CEO Lew Frankfort seems to think that with all things considered, it could have been much worse.

"Despite this being the most difficult holiday season our company has experienced during my 30-year tenure, we were able to report second quarter sales and earnings per share that were only slightly lower than prior year," Frankfort said in a statement.

Coach Inc.
At A Glance

Coach Inc.
New York, N.Y.
Primary Industry: Apparel
Number of Employees: 12,000
2007 In Review
Revenue: $3.18 billion
Profit Margin: 25.40%
Sales Turnover: 1.07
Inventory Turnover: 2.25
Revenue Growth: 23.73%
Return On Assets: 40.80%
Return On Equity: 55.83%
The IW 50 Best Manufacturer for 2008 posted net income of $216.9 million for the second quarter, down 14% from $252.3 million in the prior-year quarter as net sales declined 2% to $960.3 million.

Direct-to-consumer sales increased 2% to $818 million from the year-ago quarter, including a 1% gain in sales from new and existing North American Coach stores. North American comparable store sales for the quarter declined 13.2%. Sales in Japan, a key market for Coach, edged down 1% in constant currency, while dollar sales rose 15%, adjusted for a stronger yen. In China, sales remained robust.

Looking ahead to 2010, Coach discussed targeting approximately 20 new North American retail stores rather than the customary 40. In addition, the company said it will start to focus more on those store segments showing the best relative performance, notably Canada, with six openings planned for next year, and new U.S. markets.

Coach's plans also involve working to rebalance its product assortment for a more "price-sensitive" consumer, effectively reducing prices 10% to 15% in 2010. This will include rebalancing the assortment of handbags and small leather goods from higher price points to a range below $300, while taking similar price reductions on women's accessories.

According to Michael Tucci, president of North American retail for Coach, the company will take advantage of this opportunity by designing into this price point, engineering collections that can provide "exceptional value to our consumers, and generate excellent margins at the same time."

"This should drive our handbag penetrations higher, thereby improving mix, increasing ticket, and ultimately improving productivity," Tucci explained. "Over time, the objective is to add more selection and weight to this under $300 price band to gain share in a changed consumer marketplace."

Coach noted that it is not providing guidance for the balance of the fiscal year. In January, Coach suspended earnings per share guidance for the second half or full year fiscal 2009, citing the uncertain business environment. However, the company still believes it is financially solid and well-positioned to manage through the economic downturn.

"During this period of economic turmoil, we will continue to plan cautiously, as our financial strength affords us the ability to manage our business for the long-term," Frankfort added. "Our brand is vibrant, our leadership position intact, and we will continue to adapt our strategies to a much more price sensitive consumer."

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