Shares of handbag and accessories maker Coach, Inc. (COH) were up 3% Tuesday after its earnings beat estimates for the sixth consecutive quarter.
The move was a nice change of pace for Coach stock, which had previously fell nearly 19% year-to-date before Tuesday’s beat, and 48% over the past 2 years.
Some investors believe Tuesday’s pop indicates Coach stock has turned the corner and is now heading in the right direction. Not so fast.
For the quarter, Coach’s revenue came in at just over $1 billion while analysts were expecting $970 million. COH posted earnings per share of 31 cents, beating the 29 cents analysts were expecting. But the issue here is that revenue fell 12%, while EPS dropped 52% over the year-ago quarter.
Not only that, but Coach is performing poorly in nearly every worldwide market it operates in. North American sales (representing 65% of Coach’s sales) dropped by 19%, while sales in Japan dropped 15% and international revenue fell 5%. Even in China — a region Coach experienced growth — sales only increased by 5% compared to the 8% it saw in the last quarter. Heck, even COH’s more profitable direct-to-consumer sales dropped 20% on the quarter.
A 12% overall drop in revenue with massive declines in its major markets worldwide doesn’t indicate a company is turning itself around, at best it is a sign the fall lower is slowing.
Margins across the board also continued to decline during the quarter. Adjusted gross profit fell 12.2%, dropping gross profit margins to 69%. Adjusted operating income shrunk by 45.5% from last year’s quarter, leaving operating margin’s at a paltry 12.6%. These shrinking margins could be representative of Coach no longer having pricing power with customers. If that is the case, Coach will have serious challenges regaining its previous image of being a high-end brand able to command a higher prices for its products.
Moving forward, looking at Coach as a stand-alone brand, management believes it can increase revenue by low single-digits on a constant currency basis as currency headwinds are expected to negatively impact business results.
Coach is more excited, however, about the prospects of its recently acquired new Stuart Weitzman brand, which it believes will add $335 million to revenue and 9 cents per share to the company’s bottom line.
With the addition on $530 million in debt (the price Coach paid for Stuart Weitzman), Coach now has $889 million in long-term debt on its books, as opposed to zero in long-term debt this time last year. While taking on debt to buy new brands is common, my issue with Coach is that its core business is struggling and the Stuart Weitzman acquisition seems nothing more than management equipping itself with a life jacket.
The Stuart Weitzman unit is certainly going to help Coach stock moving forward, as its going to boost revenue and earnings per share. But, if COH’s core business continues to struggle and possible lose more brand power, the pop Coach stock received on Tuesday will be short lived.
As of this writing, Matt Thalman did not own shares of any company mentioned above. Follow him on Twitter at @mthalman5513.
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