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Coach hurt by soft sales in North America

Tags: Coach

Upscale leather goods maker Coach Inc. (COH-N) posted a marked slowdown in sales growth following a poorly timed decision to eliminate coupons at its outlet stores as the U.S. economy weakened and consumers pulled back.

The results drove Coach shares down more than 17 percent, their worst single-day performance since just after the Sept 11, 2001, attacks on the World Trade Center and the Pentagon.

Sales at North American stores open at least a year rose 1.7 percent during the quarter that ended June 30, well below what Wall Street was expecting and the pace of preceding quarters.

Coach, popular for its high-quality but relatively affordable handbags and wallets, also faced competition from rivals like Fifth & Pacific Cos Inc's kate spade stores and Michael Kors Holdings Ltd.

Coach's results were the latest sign that mid-tier consumers were becoming more cautious on how they spend, leaving companies to face grave consequences for any strategic missteps.

Spending by American consumers fell in June for the first time in nearly a year, when accounting for inflation, the Commerce Department said on Tuesday.

"You are worried about the core middle-income U.S. consumer," said Brian Sozzi, chief equities analyst at NBG Productions.

Coach said it expects North American same-store sales to be up by a low- to middle-single-digit percentage, compared with a 6.6-percent jump last year.

Coach had thought that it had the pricing power to cut back on coupons, but demand from consumers for discounts "is insatiable and growing," Chief executive Lew Frankfort told analysts on a conference call.

Under pressure during the quarter from rivals, Coach backtracked in June on its plan to eliminate coupons at its factory outlet stores, which by some estimates are twice as big a business as its full-service stores. A Coach executive said same-store sales at outlets improved very quickly after the return of coupons.

Shoppers have shown before that they will balk when stores stop giving them deals -- sales at mid-tier department store J.C. Penney Co Inc. plummeted after it stopped offering coupons this winter.

Companies as diverse as Starbucks Corp., Chipotle and Tiffany & Co have all warned in recent weeks that the U.S. consumer is under stress.

The economy so far has not taken the same toll on all of Coach's competitors. Michael Kors forecast in June that same-store sales would rise 35 percent in the current quarter, while kate spade same-store sales rose 34 percent in the latest quarter.

Michael Kors "is very clearly aiming to build assets nearby Coach's full price and factory outlet stores to attack Coach's dominant market share," UBS analyst Michael Binetti wrote in a note.

CHINA, MEN TO PROVIDE BOOST

Coach said overall revenue in its fiscal fourth quarter that ended June 30 rose 12 percent to $1.16 billion US, below the $1.2 billion that Wall Street analysts were expecting, according to Thomson Reuters I/B/E/S.

Net income was $251.4 million, or 86 cents per share, compared with $202.5 million, or 68 cents, a year earlier. That was a penny above what analysts were expecting.

Coach's sales at U.S. department stores such as Macy's Inc. and Nordstrom Inc., which account for 6 percent of company sales, were hurt by a drop in shipments.

The company continued to benefit from its overseas business. Same-store sales in China, where it is expanding quickly, rose by a double-digit percentage. Sales in Japan, its second-largest market, rose 16 percent, excluding the impact of currency.

It expects sales in China to hit $400 million this fiscal year, compared with $300 million last year. The company also said it expects its men's business to contribute one-quarter of its growth in the coming years.

Investments in store expansion, its men's business and ramped-up marketing will weigh on operating profits this year, the company said.

Frankfort warned of "the impact of the muted consumer environment in North America and a softening global macroeconomic outlook" for the new fiscal year, even as the company says its goal of double-digit percentage gains in sales and profit remains unchanged.

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