Coach’s Troubles Made in the U.S.A.

by Alyssa Oursler | July 31, 2012 2:20 pm

Coach’s Troubles Made in the U.S.A.

Last time Coach (NYSE:COH[1]) reported earnings, it seemed to tell us that rich folks were spending[2] despite a slow-growth economy.

So much for that.

The well-known designer of handbags and other high-end products took a beating today[3] after the bad outweighed the good in its Q4 earnings report. Shares dropped more than 16% and have lost around a quarter of their value since reaching a high around $80 in March.

The root of the company’s struggles? Sales, right here at home.

Same-store sales in North America grew less than expected to say the least — the rate of 1.7% was dwarfed by double-digit growth a year ago, and came up far short of expectations for 6.7%[4].

Overall revenue managed to improve for the 12th consecutive quarter — by 12% this time, with overseas sales picking up the slack — but the $1.16 billion figure missed Street estimates for $1.2 billion. Japan, Coach’s second-largest market, saw gains of 16%, while in China — whose consumers have help coming in the form of recent rate cuts recent rate cuts[5] — growth was up an astounding 60%.

Such growth abroad, though, only illuminates just how heavily American sales are weighing on retailers’ shoulders — and how things aren’t going to pick up until shoppers have a few extra bucks in their pockets.

For further proof, look no further than Coach’s recent rocky relationship with coupons.

Originally, Coach CEO Lew Frankfort — sounding a bit like J.C. Penney’s (NYSE:JCP[6]) Ron Johnson — had decided the company would wean outlet shoppers off coupons. The plan was implemented earlier in the year and was expected to be successful because Coach was the only one selling Coach products. (Not exactly rocket science.)

And — sounding even more like Ron Johnson déjà vu[7] — it didn’t work. (Maybe it is rocket science.)

Coach realized that 1.) it was struggling and 2.) it should care less about how it got customers into outlet stores, and simply should care about getting them there, period. So, in June, the company backtracked and reinstated coupons for its factory stores.

The move, as it did for J.C. Penney, hinted at desperation.

That desperation also might be coming from another problem: stiff competition in the luxury sector. Last month, IPO superstar Michael Kors (NYSE:KORS[8]) bucked the consumer spending trend[9] as it more than doubled earnings per share. And other brands like Fifth & Pacific’s (NYSE:FNP[10]) Kate Spade line could be stealing market share from Coach.

All in all, though, this isn’t the first warning we’ve had in luxury retail. The industry’s stocks have been weakening[11] since their high-flying start of the year. Coach’s numbers are just another indication that more high-end brands could be cramped by the slowing economy at home, even as emerging markets continue to pick up slack abroad.

Tuesday’s trading would seem to back up that thought. Tiffany & Co. (NYSE:TIF[12]) and Burberry (PINK:BURBY[13]) each were off roughly 4% late in the day, Ralph Lauren (NYSE:RL[14]) had shed 2%, and even KORS was down despite its rising star. As a whole, luxury stocks as measured by the Dow Jones Luxury Index were down around 2.5%.

The takeaway from Coach’s tumble is clear: The U.S. economy remains on shaky ground, so consumers still aren’t freely spending — which means fewer designer handbags are headed out the door.

Until the penny-pinching parade stops, don’t expect things at Coach — or across the sector — to get better.

As of writing this, Alyssa Oursler did not own shares of any of the aforementioned securities.

Endnotes:
  1. COH: http://studio-5.financialcontent.com/investplace/quote?Symbol=COH
  2. rich folks were spending: http://investorplace.com/2012/02/coach-earnings-coh-luxury-stocks-jwn-lulu-rl-kors-sks-aht/
  3. took a beating today: http://www.businessweek.com/news/2012-07-31/coach-revenue-trails-estimates-as-north-american-growth-slows
  4. expectations for 6.7%: http://online.wsj.com/article/BT-CO-20120731-710725.html
  5. recent rate cuts: http://investorplace.com/2012/06/the-unlikely-winners-from-chinas-rate-cut/
  6. JCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=JCP
  7. Ron Johnson déjà vu: http://investorplace.com/2012/06/jcpenney-makeover-far-from-genius/
  8. KORS: http://studio-5.financialcontent.com/investplace/quote?Symbol=KORS
  9. bucked the consumer spending trend: http://investorplace.com/2012/06/michael-kors-bucks-consumer-spending-trend/
  10. FNP: http://studio-5.financialcontent.com/investplace/quote?Symbol=FNP
  11. have been weakening: http://investorplace.com/2012/05/luxury-stocks-facing-more-trouble-except-one-tif-nile-rl-kors/
  12. TIF: http://studio-5.financialcontent.com/investplace/quote?Symbol=TIF
  13. BURBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BURBY
  14. RL: http://studio-5.financialcontent.com/investplace/quote?Symbol=RL

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