04 May Coach’s Sales Drop 4 Percent In Q1
Coach Inc. reported sales declined 4 percent on a reported basis and 3 percent on a constant currency basis due to its effort to reposition the Coach brand. Net earnings were up slightly.
Victor Luis, chief executive officer of Coach, Inc., said, “Our solid performance this quarter was very much in line with our expectations and our strategic initiatives. In a volatile and complex global environment, we delivered continued positive comparable store sales for the Coach brand in North America and gross margin expansion in each segment, while tightly controlling costs. We continued to drive growth in our directly-operated Europe and Mainland China businesses, which represent the most significant geographic opportunities for our brands. And, despite our deliberate pullback in the North America wholesale channel and the impact of calendar shifts, we delivered earnings growth. Importantly, we announced a new leadership structure and strengthened our Coach brand team, a critical step in Coach, Inc.’s evolution as a customer-focused, multi-brand organization.”
Overview Of Third Quarter 2017 Consolidated, Coach Inc. Results:
- Net sales totaled $995 million for the third fiscal quarter, a decrease of 4 percent on a reported basis and 3 percent on a constant currency basis. As planned, the Company’s strategic decision to elevate the Coach brand’s positioning in the North American wholesale channel through a reduction in promotional events and door closures negatively impacted sales growth by approximately 150 basis points in the quarter.
- Gross profit totaled $706 million, a decrease of 1 percent on a reported and non-GAAP basis. Gross margin for the quarter expanded 190 basis points from prior year to 70.9 percent on both a reported and non-GAAP basis.
- SG&A expenses totaled $555 million on a reported basis, a decrease of 4 percent, and represented 55.7 percent of sales compared to 56.0 percent in the year-ago quarter. On a non-GAAP basis, SG&A expenses were $544 million, a decrease of 3 percent, or 54.6 percent of sales as compared to 54.3 percent in the year ago period, reflecting in part the Company’s continued investment in Stuart Weitzman.
- Operating income for the quarter on a reported basis totaled $151 million, an increase of 13 percent, while operating margin was 15.2 percent versus 13.0 percent. On a non-GAAP basis, operating income was $162 million, an increase of 7 percent, while operating margin was 16.3 percent versus 14.7 percent.
- Net interest expense was $4 million in the quarter as compared to $7 million in the year ago period.
- Net income for the quarter on a reported basis totaled $122 million, with earnings per diluted share of 43 cents. This compared to reported net income in the third quarter of FY16 of $112 million with earnings per diluted share of 40 cents. On a non-GAAP basis, net income for the quarter totaled $130 million compared to $124 million a year ago, an increase of 5 percent, with earnings per diluted share of 46 cents, up 4 percent versus prior year.
Coach Brand Third Quarter Of 2017 Results:
Net sales for the Coach brand totaled $915 million for the third fiscal quarter, a decrease of approximately 4 percent on a reported and constant currency basis, consistent with expectations. As planned, the strategic actions in the North America wholesale channel negatively impacted sales growth by about 150 basis points.
Third fiscal quarter sales results in each of Coach’s primary segments were as follows:
- Total North American Coach brand sales decreased 5 percent on a reported and constant currency basis to $474 million versus $499 million last year. Both North American aggregate and bricks and mortar comparable store sales rose approximately 3 percent despite the negative impact of the shift in timing of Easter. Total North American direct sales declined 2 percent for the quarter, reflecting the change in the fiscal calendar on non-comparable sales. As planned, sales at North American department stores declined approximately 40 percent on both a POS and net sales basis.
- International Coach brand sales totaled $430 million compared to $448 million a year ago, a decrease of approximately 4 percent on a reported basis, including approximately 70 basis points of pressure related to foreign currency translation. Greater China sales declined 2 percent versus prior year in dollars and increased 2 percent on a constant currency basis, driven by strong growth and positive comparable store sales in Mainland China, offset by continued softness in Hong Kong and Macau. In Japan, sales rose 2 percent in dollars and decreased 1 percent in constant currency. Sales for the remaining directly-operated businesses in Asia decreased low-double digits on a reported and constant currency basis, due primarily to weakness in Korea where macroeconomic and geopolitical headwinds have pressured spending from domestic consumers and tourists. Sales in the directly operated channels in Europe remained strong, growing at a double-digit rate in constant currency, while total sales decreased modestly in dollars and rose slightly in constant currency, reflecting the impact of the planned shift in wholesale shipment timing. As expected, international wholesale declined on a net sales basis due to shipment timing with the fourth quarter, while POS sales also declined.
- Gross profit for the Coach brand totaled $656 million, a decrease of 2 percent on a reported and non-GAAP basis. Gross margin for the quarter increased 180 basis points over prior year, including approximately 20 basis points of benefit from currency, to 71.7 percent on both a reported and non-GAAP basis.
- SG&A expenses totaled $509 million for the Coach brand on a reported basis, down 5 percent versus prior year, and represented 55.6 percent of sales compared to 56.3 percent of sales in the prior year’s third quarter. On a non-GAAP basis, SG&A expenses were $500 million, a decrease of 4 percent, and represented 54.6 percent of sales versus 54.8 percent in the year ago period.
- Operating income for the Coach brand on a reported basis was $147 million, an increase of 14 percent, while operating margin was 16.1 percent compared to operating margin of 13.6 percent a year ago. On a non-GAAP basis, operating income was $156 million, an increase of 8 percent, while operating margin was 17.1 percent compared to operating margin of 15.1 percent on a non-GAAP basis a year ago.
Stuart Weitzman Third Quarter Of 2017 Results:
- Net sales for the Stuart Weitzman brand totaled $80 million for the third fiscal quarter compared to $79 million reported in the same period of the prior year, an increase of 1 percent, impacted by wholesale shipment timing.
- Gross profit for the Stuart Weitzman brand totaled $50 million, an increase of 8 percent versus prior year, on a reported and non-GAAP basis. Gross margin for the quarter was 62.1 percent, an increase of approximately 390 basis points over prior year, on a reported and non-GAAP basis, reflective, in part, of channel mix, the benefit of currency, and lower promotional levels.
- SG&A expenses for the Stuart Weitzman brand were $46 million on a reported basis, compared to $41 million in the prior year, and represented 57.3 percent of sales compared to 52.3 percent of sales in the prior year’s third quarter. On a non-GAAP basis, SG&A expenses were $44 million compared to $39 million in the prior year due to an increase in store occupancy costs as well as the company’s strategic investments in team and infrastructure. As a percentage of sales, SG&A was 55.2 percent compared to 48.9 percent of sales a year ago.
- Operating income for the Stuart Weitzman brand was $4 million or 4.7 percent of sales as reported compared to $5 million or 5.9 percent of sales in the prior year’s third quarter. On a non-GAAP basis, operating income was $6 million or 6.9 percent of sales versus $7 million or 9.3 percent of sales in the prior year.
Luis continued, “At Stuart Weitzman, we’re executing on our plan, driving global awareness and brand relevance, and gaining traction with the millennial consumer. The response to spring newness has been particularly strong, and we continue to expect sales to increase at a double-digit pace for both the fourth quarter and the year. We’re also making key brand investments in management and creative talent, as well as infrastructure to support long-term, multi-category growth. To this end, we’re especially excited about the arrival of Giovanni Morelli, who joins the brand this week as Creative Director.”
During the third quarter of FY17, the company recorded the following under its previously announced plans:
- Operational Efficiency Plan: charges of approximately $6 million, primarily related to organizational efficiency and technology infrastructure costs.
- Acquisition-Related Costs: charges of approximately $5 million associated with the acquisition of Stuart Weitzman (which primarily includes charges attributable to contingent payments and integration-related activities).
These actions taken together increased the company’s consolidated reported SG&A expenses by about $11 million, negatively impacting reported net income by $8 million after tax or about $0.03 per diluted share in the third quarter.
“While the retail environment remains uncertain, our strategic vision for our brands and our company remains clear. The traction we’ve achieved to date on our transformation plan and the success of our integration of Stuart Weitzman give us continued confidence in our direction. Moreover, with our new leadership structure, Coach, Inc. is well positioned to continue its journey as a global house of brands and to focus on opportunities to drive long-term and sustainable growth,” Luis concluded.
Fiscal Year 2017 Outlook
The following fiscal 2017 guidance is provided on a non-GAAP, 52-week basis versus 52-week basis.
The company is maintaining its operational outlook for fiscal 2017 as outlined in January.
The company continues to expect revenues for fiscal 2017 to increase low-single digits, including the impact of currency.
In addition, the company is maintaining its operating margin forecast for Coach, Inc. of between 18.5-19.0 percent for fiscal 2017. This guidance incorporates the negative impact of both Stuart Weitzman and the strategic decision to elevate the Coach brand’s positioning in the North American wholesale channel, including a reduction in promotional events and the closure of about 25 percent of doors.
Interest expense is now expected to be in the area of $20 million for the year while the full year fiscal 2017 tax rate is still projected at about 26 percent.
Taken together, the company continues to project double-digit growth in both net income and earnings per diluted share for the year.