Good news for Coach as Q4 tops expectations, but sales still fall

It was a brighter day for Coach on Tuesday despite its current sales and profits woes. The US accessories giant managed to beat expectations for Q4 on the back of strong international sales with Chinese revenues surging as much as 20%. Its shares were up $1.49 to $35 in Tuesday trade. Its overall international sales rose 7% and its impressive turnover in China is expected to continue with forecasts of a 10% sales rise there for fiscal 2015. That performance is particularly encouraging given the slowdown seen by some other luxury players, such as LVMH, in China recently.

The shares, predictably, rose. They were up around 6% at one point as investors and analysts signaled approval of the company’s first better-than-expected sales story in four quarters.

Yet this is still an undeniably challenging time for Coach. The shares may have risen but that rise should be set against their fall of 36% over the last year and a Q4 report that contained plenty of negative news.

Its biggest problem is its biggest market – North America. The company that was a pioneer in the affordable luxury segment has lost ground to fast-growing rivals with the current runaway success of Michael Kors often quoted as a particular thorn in Coach’s side. Only recently Kors reported another set of storming results. But for Coach, that North American market has been tepid and driven by discounting with the company planning to close some stores there.

So just what were those Q4 numbers? Net sales were down 7.1% to $1.14bn for the three months to June 28, or down 6% currency-neutral. Profit fell to $75.3m/$0.27 a share, from $221.3m/$0.78. Excluding special items, earnings fell to $0.59 a share from $0.89.

Total North American sales fell 16% to $691m while North American direct sales fell 15% and comp sales dropped a big 17%. Sales in department stores there were “modestly” above the prior Q4 but for the year as a whole, they fell 11% to $3.1bn.

On the international front, full-price sales were much easier to come by and the 7% turnover increase represented revenue of $414m and a currency-neutral rise of 9%. While Chinese sales rose strongly as previously mentioned, Japan remained a problem with currency-neutral sales down 6% and dollar sales down 10%, hurt by the weaker yen.

CEO Victor Luis said the quarter capped “a challenging year for the company, most notably in the North America women’s bag and accessory business.”

But he focused on the positives, highlighting the successful integration of its retail businesses in Europe, surpassing $500m in sales in China, driving Men’s to about $700m in sales globally and laying the groundwork for its brand transformation. He also said the arrival of executive creative director Stuart Vevers last September has already had a “significant impact” on the creative direction of the brand.

He added: “It’s important to note that Coach is a strong brand participating in a vibrant and growing global category. While the competitive landscape has shifted, we’re keenly aware of the evolving market context and have a clear vision on how to address our challenges. Importantly, we have the right team, the operational experience and the resources to execute our plan. While this is a journey, we believe the opportunities for our brand, our shareholders and our team are compelling.”

Backing up that view, he said that the company is investing heavily and “re-platforming” the brand with the launch of the first Stuart Vevers collection this autumn. The brand’s new “modern luxury” retail concept is being unveiled in several key locations during the Holiday season.

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