Investors in luxury leather goods maker Coach Inc. (NYSE: COH) saw their shares tumble earlier this week when the company announced that profit fell 14% in its second fiscal quarter.
Coach earned 67 cents per share for the quarter compared to earnings of 69 cents per share in the year-ago quarter, and sales fell 1.8% to $960.3 million. Gross margin narrowed to 72.1% from 75.4% last year.
Like many other companies, Coach did not provide guidance for the balance of the fiscal year, signifying its lack of visibility going forward. But the company did try to assure investors by pointing to its nearly debt-free balance sheet and large cash position. Shares fell by as much as 15% during trading on Wednesday, but rallied to halve that loss later in the day.
In order to "protect our brand identity," CEO Lew Frankfort said the company resisted discounting during the holiday season. It paid a steep price to do so, because other retailers' heavy discounts hurt traffic at Coach's stores and in department stores.
Frankfort noted that the 2008 holiday season was the most difficult he's seen during his 30 years as CEO. Indeed, sales at stores open at least a year; otherwise known as same-store sales -- a key retail metric -- fell 13.2% for the quarter.
We'll see if the strategy to protect brand identity pays off, but, for now, the going is tough.
One analyst observed that "at the end of the day, when you're in a mall and see all the competitors' 50% off signs and Coach sticks to its full-price strategy, it becomes challenging to pull in traffic." The analyst said one of the few alternatives for Coach is to focus on full-price products at lower price points.
Coach is doing just that. While it will still offer a wide array of products above $300 (the average price of a Coach handbag has risen to between $330 and $340), Mike Tucci, president of the retail division, said that, over time, the company's objective is to add more collection and weight to the under-$300 price in order to gain share in a changed consumer marketplace.
The company figures a more "price sensitive" consumer will better respond to items priced between $200 and $300.
Coach is also rolling back its new store openings, from about 40 new stores in North America per year to about 20, and suspending existing retail store expansions. But overseas expansion is still on track, as the company said it will continue to implement its distribution growth plans to expand in emerging markets, particularly China, where sales rose at a double-digit rate.
Back in October, when I profiled Coach, I cited an interview Mr. Frankfort gave. At that time, he said the biggest issue confronting retail is the lack of consumer confidence, and until people have confidence that the economy won't go into a deeper recession, its expected consumers are going to be cautious.
I don't see that anything has changed, but I also said COH shares were attractive (then trading for $18) but to wait for a pullback before buying. Though we got the pullback this month, I still believe these shares may have further to fall.
Jamie Dlugosch is a contributor to OptionsZone.com.
Reader Comments (Page 1 of 1)
1-24-2009 @ 11:48PM
Iridium said...
Coach and other designer labels are a total fraud. They sell a cheap chinese handbag that costs less that $30 to manufacture for $400.
In fact many Coach bags are made for less than $10 in Chinese sweatshops.
Anyone that pays more than $50 for a designer purse is a complete fool.