Amid a sluggish recovery in the economy, Coach, Inc. (COH) recently posted fourth-quarter 2012 results. The quarterly earnings of 86 cents a share beat the Zacks Consensus Estimate by a penny, and increased 27% from 68 cents earned in the prior-year quarter, buoyed by healthy top-line growth on the back of strong sales in China.
The New York-based Coach said that net sales for the quarter came in at $1,155.2 million, up 12% from the year-ago quarter, but below the Zacks Consensus Estimate of $1,197 million.
International sales remained the driver behind the growth during the quarter. Sales in North America were hurt by cautious consumer behavior that resulted in lower-than-anticipated growth at the factory stores.
Behind the Headline
Direct-to-consumer sales jumped 13% to $1.05 billion driven by a 1.7% 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 16%, excluding foreign currency translation, whereas in dollar terms, sales climbed 18%. Sales in China surged 60%.
Indirect sales came in at $108 million flat compared with the prior-year quarter. International sales remained robust at POS (point of sale), 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, which has been 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.
The company remains optimistic about its unisex Legacy lifestyle collection, dedicated men’s stores and international growth opportunities to counter the soft consumer scenario in North America and sluggish economic environment.
Gross profit rose 13% to $838 million, spurred by top-line growth, whereas gross profit margin increased 80 basis points to 72.6%. Adjusted operating income rose 19% to $371 million, whereas operating margin expanded 180 basis points to 32.1%.
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 achieved more than $300 million in sales in China during the year, backed by sustained growth momentum. 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 and Korean retail business in the first quarter of 2013.
Store Update
During the quarter, Coach, the maker of handbags, wallets, shoes and other accessories, opened 4 retail location, and opened 7 factory stores, including 5 Men’s stores, taking the total to 354 retail stores and 169 factory stores in North America at the end of the quarter. In Japan, the company opened 2 Men’s retail outlets and a factory store, bringing the total number of locations at 187.
In China, an addition of 11 new locations during the quarter took the total to 96. As a result of the acquisitions of retail businesses in Singapore and Taiwan, the company now operates 7 and 27 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 shareholder returns. 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 $917.2 million and total long-term debt of $23.4 million with shareholders’ equity of $1,992.9 million.
Coach also notified that it bought back approximately 2.5 million shares at a cost of $67.79 per share, aggregating $169 million during the quarter. During fiscal 2012, the company repurchased approximately 10.7 million shares at a cost of $65.49 per share totaling $700 million. The company still has approximately $260 million at its disposal under its share repurchase authorization.
Currently, we maintain our long-term Neutral recommendation on the stock. However, Coach, which competes with Ralph Lauren Corporation (RL), holds a Zacks #3 Rank that translates into a short-term Hold rating.
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