Coach Shares Gain as Forecast Signals Turnaround Is On Track

(Bloomberg) -- Coach Inc. rallied the most in eight months after the luxury handbag maker stuck by its annual sales forecast, giving investors confidence that its turnaround is making progress. 

The New York-based fashion house reiterated that revenue will increase by a low- to mid-single-digit percentage in the year through June, maintaining a forecast it provided in August.

The outlook soothed investors, who feared that turmoil in the handbag industry would take a bigger toll on the 75-year-old brand. As part of its comeback effort, Coach is on a crusade to get customers to pay full price for its wares. To increase the allure of its products, it's been introducing new items such as its Drifter and Mercer bags, as well as limited-edition offerings.

Coach also is removing its merchandise from 250 department stores, where ailing traffic has forced it to pile on steep discounts to sell its wares. The move helped the company trim its inventory by 5 percent to $547 million last quarter.

“We are encouraged that the turnaround is on track,” said Scott Krasik, an analyst at Buckingham Research Group. Still, Krasik is maintaining a neutral rating on the stock. He said he wants to see evidence that the handbag category overall is improving or that Coach plans to make a large strategic action before he'll raise his view on the shares.

Coach rose as much as 5.7 percent to $37.94 in New York, the biggest intraday gain since February. The shares had increased 9.7 percent this year through Monday.

The company also reiterated Tuesday that net income and earnings per share will grow by a double-digit percentage this year.

During the last quarter, the company removed goods from 120 department-store locations and will pull its wares from the remaining 130 in the third quarter, Chief Executive Officer Victor Luis said on a conference call Tuesday. The company still expects to return to growth across all of its key financial metrics in fiscal 2017.

Acquisition Strategy

Two weeks ago, the Betaville financial blog speculated that Coach is considering merging with British fashion house Burberry Group Plc. The company said on Tuesday it has no imminent acquisitions planned, though it has the flexibility to act when it's in shareholder's interest.

“Most importantly we look for great brands; we're not committed to any specific nationality, so I would keep that in mind,” Luis said.

Coach has been renovating stores, stepping up its marketing efforts, expanding its menswear line and pushing accessories such as the Stuart Weitzman shoe brand that it bought last year. To make its brand more desirable and exclusive, the company is selling its 1941 line at more top-tier specialty stores and will open its first major Milan shop on the upscale shopping street of Via Monte Napoleone.

Sales Gain

Sales rose 0.7 percent to $1.04 billion in the fiscal first quarter, ended Oct. 1. That just missed analysts' $1.07 billion average estimate. Profit was 45 cents a share, excluding some items, matching analysts' average projection.

Comparable-store sales in North America rose 2 percent, trailing the average estimate for a 2.2 percent increase compiled by Consensus Metrix.

Luis said global economic and political uncertainties are weighing on consumer sentiment, limiting Coach's ability to forecast growth for its product categories. But the CEO said he remains confident its turnaround efforts will bear fruit. The company saw strong sales in the U.K. even after it voted to leave the European Union, a move that has rattled the economy there.

“Our solid first-quarter results, despite the volatile economic environment and global macroeconomic headwinds, reflect the continued progress we are making in our transformation and pursuing our vision of modern luxury,” Luis said.

To contact the reporter on this story: Stephanie Wong in New York at swong139@bloomberg.net. To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Kevin Orland