Shares of Coach Inc. fell 3.5 percent Tuesday despite a 34.1 percent jump in fourth-quarter profits from the handbag and accessories firm.
For the three months ended July 3, net income was $195.5 million, or 64 cents a diluted share, from $145.8 million, or 45 cents, in the year-ago quarter. Sales rose 22.2 percent, to $950.5 million from $777.7 million, and North American same-store sales gained 6.3 percent.
For the year, income increased 17.9 percent to $734.9 million, or $2.33 a diluted share, from $623.4 million, or $1.91, last year. Sales rose 11.7 percent to $3.61 billion from $3.23 billion.
Shares Tuesday closed at $37.10, down $1.33, as equities receded on word of flat personal expenditures. (For more on stocks, click here.)
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Lew Frankfort, chairman and chief executive officer, said on a conference call with Wall Street analysts, “Our results reflected growing recognition of the Coach brand globally and consumers’ strong response to our product offering and clearly bodes well for the future.”
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He also said China is the firm’s “single-largest growth opportunity,” with men’s as a new global initiative that represents strong growth opportunities for the company’s bottom line.
According to company research, the Chinese female consumer has a household income of $35,000 and the middle class last year had a 40 percent growth rate.
Frankfort told WWD plans for the China expansion pegged the operation as a $250 million-plus business in two years. It’s currently in its first full year and has sales of over $100 million.
In addition to directly owned businesses in China and Japan, the firm recently signed a deal to take control of the retail operations in Singapore and Malaysia, beginning in July 2011.
While the company is also expanding in Europe starting with France and then in the U.K., Spain and Portugal, the ceo said market contraction in the region, coupled with competition from local European and pan-European brands, could limit growth in comparison to opportunities in Asia. “We believe we can insulate ourselves effectively over time [in Europe] and secure a 5 percent market share in these markets. Eventually, over seven to 10 years, it can be a $250 million to $300 million business in Western Europe.”
Frankfort said the men’s market, currently between 3 percent and 4 percent of the company’s global sales, could provide significant growth. The company in May opened its first men’s freestanding store on Bleecker Street in Manhattan. The ceo said Coach will open 10 men’s factory stores in North America this year.
The overall men’s global premium bag and small leather goods market is $4 billion, or 15 percent of the total premium market. In Japan, the men’s premium market is $1 billion, or over 20 percent of total sales, while in Greater China, men’s is about a $900 million business, or more than one-third of the total $2.5 billion market. The opportunities in Asia are greater than in the U.S., and Coach believes its men’s business could add nearly $300 million to operations over the next few years.
“Men play a larger role in accessories in Asia than the U.S. Very frequently for Japan and China, Asian men carry multiple bags and small leather goods and swap them out,” Frankfort pointed out.
The company also said that while it is facing increased labor costs in China, it is also designing and engineering product with the goal of improving costs without compromising quality. Frankfort said that while leather costs have on average risen 3 percent, that’s been offset by countersourcing. Coach is strengthening its leather, fabric and hardware sourcing capabilities, and diversifying manufacturing outside of China. Some production has moved to Vietnam, and the firm is looking to expand production in India.
According to Frankfort, the labor costs represent a one-time increase in which the government raised the minimum rate to cover wage increases for 2009, in which there was no increase, and 2010.
The firm, which didn’t provide specific guidance, expects to drive sales and earnings at a double-digit pace in the 2011 fiscal year. Frankfort also expects a “strong holiday” sales period.