Coach reports slight decline in Q1 net sales, maintains FY16 outlook

Coach for its first quarter ended September 26, 2015 reported net sales of 1.03 billion dollars compared with 1.04 billion dollars in the same period of the prior year, a decrease of 1 percent. On a constant currency basis, total sales increased 3 percent for the period.

“We are pleased with our first quarter performance, which was consistent with our plan and reflected continued progress on our transformation journey. We drove further sequential improvement in our North America bricks and mortar business - led, as expected, by our retail stores - with this momentum continuing into the second quarter. Our international businesses posted moderate growth on a constant currency basis, highlighted by double-digit increases in Europe and Mainland China, as well as sales gains in Japan,” said Victor Luis, Chief Executive Officer of Coach.

Q1 profit and gross margin decline

Gross profit totaled 697 million dollars versus 719 million dollars a year ago on a Non-GAAP basis, while gross margin was 67.7 percent versus 69.3 percent. On a reported basis, Coach gross profit was also 697 million dollars versus 715 million dollars a year ago, with a gross margin of 67.6 percent versus 68.9 percent.

Operating income on a non-GAAP basis totaled 165 million dollars compared to 217 million dollars in the prior year, while operating margin was 16 percent versus 20.9 percent. On a reported basis, operating income was 141 million dollars compared to 180 million dollars in the prior year, while operating margin was 13.7 percent versus 17.3 percent.

Net income for the quarter on a Non-GAAP basis totaled 113 million dollars, with earnings per diluted share of 0.41 dollar. This included a contribution of 11 million dollars or 0.04 dollar per share from Stuart Weitzman. This compared to non-GAAP net income in the first quarter of FY15 of 146 million dollars with earnings per diluted share of 0.53 dollar. On a GAAP basis, net income for the quarter was 96 million dollars with earnings per diluted share of 0.35 dollar including a contribution of 5 million dollars or 0.02 dollar per share from Stuart Weitzman.

Coach brand Q1 net sales down

Net sales for the Coach brand totaled 943 million dollars compared with 1.04 billion dollars reported in the same period of the prior year, a decrease of 9 percent. On a constant currency basis, total sales decreased 5 percent for the period.

Total North American Coach brand sales decreased 11 percent on a reported basis and 10 percent on a constant currency basis, reflecting sequential improvement. North American direct sales declined 12 percent on a dollar basis and 11 percent on a constant currency basis for the quarter, with comparable store sales down 9.5 percent. At POS, sales in North American department stores declined at a mid-teens rate versus prior year, while net sales into department stores declined to a lesser degree.

International Coach brand sales declined 3 percent but on a constant currency basis, International sales rose 6 percent. Total China sales rose 2 percent in dollars and 3percent in constant currency with double-digit growth and positive comparable store sales on the Mainland offset in part by continued weakness in Hong Kong and Macau. In Japan, sales rose 6 percent on a constant currency basis, while dollar sales declined 10 percent, reflecting the weaker yen.

Sales for the remaining directly operated businesses in Asia grew slightly in constant currency while down in dollars, while Europe remained very strong, growing at a double digit pace in both total and comparable store sales. At POS, sales in international wholesale locations decreased due to softness in travel retail, in turn impacted by MERS, while domestic distributor markets showed growth. Net sales into the channel also declined from prior year.

Gross profit for the Coach brand totaled 647 million dollars on both a non-GAAP and reported basis, while gross margin was 68.6 percent, pressured by about 60 basis points from currency.

Stuart Weitzman first quarter highlights

Net sales for the Stuart Weitzman brand totaled 87.5 million dollars and gross profit totaled 50.6 million dollars on a non-GAAP basis, resulting in a gross margin of 57.8 percent and 49.7 million dollars with a margin of 56.8 percent, as reported.

Operating income was 15.1 million dollars representing an operating margin of 17.2 percent on a non-GAAP basis, and 7.7 million dollars or 8.8 percent as reported.

Maintains fiscal year 2016 outlook

The company is maintaining its FY16 outlook outlined in August. Coach brand revenues for are expected to increase by low-single digits in constant currency on a 52-week basis. Based on current exchange rates, foreign currency will have an approximate 200 basis point negative impact on overall revenue growth distorted to the first half. Gross margin for the Coach brand is still projected to be in the area of 70 percent on a constant currency basis, while negative foreign currency effects may impact gross margin by 80-100 basis points.