Coach Works on Expanding its Product Line

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Leather goods aren’t selling like they used to at Coach (NYSE: COH). The company had unexpected weak sales in their North American segment which led to a 10% drop in its stock price on July 30. With competition growing from the likes of Michael Kors Holdings (NYSE: KORS), Kate Spade, and Tory Burch, Coach is busy transforming itself into a lifestyle brand and expanding its core leather goods business. There is also a management shakeup going on with two senior executives leaving at the end of August and the company replacing its executive creative director.

Coach reported for the fourth fiscal quarter ended June 29, net income of $221 million, or diluted EPS of $0.78, compared to $251 million and diluted EPS of $0.86 reported in the fourth quarter of 2012. For fiscal 2013, net income totaled $1.034 billion and diluted EPS was $3.61 versus 2012’s $1.039 billion and diluted EPS of $3.53.

Total quarterly North American sales in the period increased 6% to $825 million from $781 million in 2012, but comparable store sales were down 1.7%. For the full year, total sales in the North American market totaled $3.48 billion, an increase of 5% from $3.32 billion in 2012. Comparable store sales were even with last year’s numbers, while POS sales were below prior year and shipments to North America declined.

Competing brands are taking market share

To better compete with its rivals, Coach revamped its shoe collection in the past few months and, in October, will be unveiling a clothing line in a holiday collection. The company is estimating a modest sales increase next fiscal year in the low to mid single digits, but won’t forecast an improvement in same-store sales until it's certain that sales are, in fact, improving.

In comparison, Michael Kors’ net income for the fourth quarter was $101.1 million, or $0.50 per diluted share. For fiscal 2012, net income was $41.6 million, excluding a $2 million credit for reimbursement of professional fees related to the company’s IPO; diluted EPS was $0.21. The company’s comparable same store sales grew 35%, which was attributed to increasing demand for the brand, an exciting product line, and an “exceptional jet-set in-store experience.” For fiscal 2014, Michael Kors estimates comparable store sales to increase by 15% to 20%, and diluted EPS to fall in the range of $2.43 to $2.47.

Fifth & Pacific (NYSE: FNP), which owns the lifestyle brands Kate Spade, Juicy Couture, and others, had net sales for the first quarter of $372 million, up 17.2% from the same period last year. Adjusted loss per share from continuing operations for the first quarter of 2013 was ($0.16), an improvement over the first quarter of 2012 loss of ($0.22).

The Juicy Couture brand experienced significantly lower gross margins than in 2012, and the brand’s issues are being worked on under the direction of a new CEO. The Kate Spade brand was a top performer with a 34% increase in net sales, which totaled $141 million, and a 22% increase in direct-to-consumer comparable sales. Prospects are high for the newly launched Kate Spade Saturday product line and the brand is also expanding in Asia.

My Foolish conclusion

Coach’s future seems dependent on whether it can expand beyond its core handbag and accessories business, which is not performing well at the moment in its core North American market. The company also seems focused on moving its inventory through its discounted outlet stores rather than its regular price locations, a move that could hurt the brand’s image over the long term. Throughout 2014, Coach plans to open two traditional retail stores and close 16, while the company plans to open 14 outlet locations. Michael Kors’ shares, trading at 21.55 times 2015 earnings and with a PEG ratio of 0.93, seem to be the best buy of the group and has a strong product line that Coach may be seeking to emulate.

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Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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