Coach Gives Tepid Forecast Amid Turbulent Retail Environment

(Bloomberg) -- Luxury handbag maker Coach Inc. forecast earnings and sales for the current year that were roughly in line with analysts' expectations, showing that the company's turnaround efforts are being challenged by a difficult retail environment.

Revenue for fiscal 2017 will increase at a low-to-mid-single-digit percentage rate, and earnings per share will grow at a double-digit pace, the New York-based company said in a statement Tuesday. Analysts estimated a 4 percent revenue gain and a 15 percent increase in adjusted earnings.

The outlook signals that Coach is confident in the progress that it's making in reviving the cachet of its brand, with increased sales at full price at its own stores. Yet the company has more work to do in improving its outlet business, and ailing traffic at department stores resulted in heavy discounting. Consumers also have restrained their spending on non-essential items amid recent economic turbulence.

“The macroeconomic environment is uncertain, currency crosswinds are affecting tourist flows and the recent geopolitical events and tragic terrorist attacks are negatively impacting sentiment,” Chief Executive Officer Victor Luis said on a conference call. “As a result, visibility into category growth is limited as the landscape continues to rapidly shift.”

Coach fell 1.4 percent to $40.88 at 11:16 a.m. in New York. The shares had increased 27 percent this year through Monday.

Fourth-Quarter Results

Fourth-quarter results were mostly positive. Profit was 45 cents a share, excluding some items, in the quarter ended July 2. Analysts projected 41 cents, on average. Sales rose 15 percent to $1.15 billion, in line with analysts' $1.16 billion average estimate.

Coach has been introducing new items, such as a line of Mickey Mouse handbags and other limited-edition offerings, to entice shoppers to pay full price. The moves helped comparable sales in North America rise 2 percent, beating the 1.8 percent increase that analysts expected, according to the average of estimates compiled by Consensus Metrix. Total North American Coach brand sales increased about 9 percent to $606 million.

To keep margins improving, Coach said on Tuesday that it plans to close 25 percent of the department store distribution, or 250 locations, because of the higher markdowns that have hurt its brand image.

Tourist Traffic

Luis said the company hasn't seen a dramatic shift in tourist arrivals in the U.S. quarter to quarter. While there was a slight decrease of Chinese tourists to the country, it was made up by an increased number from Japan and South Korea, he said.

Internationally, Coach sales rose 15 percent to $450 million, with double-digit growth from mainland China. Luis said the company still sees Chinese consumers as an increasing part of its total business.

Coach predicted a low single-digit percentage increase in comparable sales in North America this year. For outlets, comparable sales are expected to be flat, said Andrea Cohen, president of North America.

The company also has brought on new personnel to help enliven the brand and expand its offerings beyond handbags. Coach bought designer shoe brand Stuart Weitzman last year and hired Wendy Kahn, former U.S. CEO of Valentino Fashion Group SpA, as the chief of the brand.

On Tuesday, Coach named Giovanni Morelli the brand's creative director, succeeding its namesake founder and current chairman. Morelli, who had worked at Prada SpA, Burberry Group Plc and most recently Loewe AG, will start on May 5.

To contact the reporter on this story: Stephanie Wong in New York at swong139@bloomberg.net. To contact the editors responsible for this story: Kevin Orland at korland@bloomberg.net, Mark Schoifet