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Coach manages to beat market expectations despite 85 percent net income dip

By Angela Gonzalez-Rodriguez

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Business |ANALYSIS

Coach's net income fell 84.4 percent to 11.7 million dollars, or 4 cents per share, in the quarter ended June 27. However, Coach, Inc. (NYSE:COH) still managed to beat Wall Street’s expectations for its fiscal fourth quarter, boosting its stock by nearly 7 percent in early trading Wednesday.

"We're not focused on market share in the short term, we are very focused on how we make the Coach brand relevant for long-term growth," Chief Executive Victor Luis told Reuters about the company’s results.

The American handbag maker now plans to re-gain its place as a luxury brand. Conlumino's Chief Executive Neil Saunders considers that these efforts are "directionally correct," but analysts warned that it could be difficult to implement the strategy as rivals get more aggressive with promotions.

Significant challenges ahead for Coach in 2016

“We believe Coach still faces significant challenges in 2016 as it continues its attempts to revitalise its brand while fending off aggressive competition,” stated Cantor Fitzgerald analyst Laura Champine in note to investors Wednesday.

Champine upgraded her rating on Coach, Inc. from ‘sell’ to ‘hold’ and raised her target price on the shares from 31 to 33 dollars, reflecting in her new valuation the company’s market share decline, following the 13 percent year to date decline in the share price.

The luxury accessories brand posted a net income of 11.7 million dollars, or 0.04 dollars per share, down from 75.2 million dollars, or 0.27 dollars per share in the year-ago quarter, on revenues of 1 billion dollars, below the 1.14 billion dollars sales the firm reported in the same quarter last year.

Although earnings per share (EPS) in the fourth quarter were better than expected thanks to lower interest expense and the 43 million dollars top-line contribution from its recently acquired Stuart Weitzman, same store sales declined 19 percent, after having fallen 17 percent in the previous year.

Same store sales declined for the first time since Coach started reporting them

In this regard, Cantor Fitzgerald report highlights that “SSS (same store sales) declined for the first time since the company began reporting the quarterly trend in FY:10.”

Looking ahead, analysts predict a gloomy 2016 where the company’s market share that in FY15 declined 23 percent from last year’s levels, will continue. Additionally, China is unlikely to continue to be a growth engine for Coach, according to market experts.

Of a similar opinion was Barclays analyst Joan Payson, who maintained an ‘overweight’ rating on Coach. Nevertheless, she lowered her price target on the stock from 50 to 46 dollars.

The company closed FY15 with its domestic business in-line with the targets, along with “incremental signs of improvement,” according to Barclays.

On the bright side, Payson believes that there is potential for the North American comparable sales to turn positive in FY16, driven by reduced promotional activities, reports ‘Bezinga’. “Outlets have been experiencing increases in ticket, reflecting positive response to new designs, now half of product,” the Barclays report said, while adding that handbag sales accelerated during 4Q15.

Similarly, in a report published Wednesday, Piper Jaffray analyst Erinn E. Murphy maintained a ‘neutral’ rating and price target of 33 dollars on Coach.

“COH noted they saw a slowdown in the overall handbag category in the month of June in particular. We believe category trends could still slow which makes the space more broadly challenging to invest behind,” she said, adding that the weakening of numbers during 4Q for the core Coach brand is largely reflected in the stock valuation.

Coach executives have their sights set on a 5-6 percent category growth in FY16, driven by a rebound in the European luxury segment, along with growth in smaller brands and distribution growth from the more established North American brands.

Equally confident in the months ahead for Coach was Wedbush analyst Morry Brown. “Several positive signs stood out, particularly the sequential improvement in the two-year comp trend and positive SSS at the 45 Modern Luxury remodels in North America,” Brown said, adding that the “2016 guidance skewed negative versus consensus across all key metrics.”

“China overall saw negative comps, with strength in mainland China was offset by weakness in HK and Macau. Management anticipates overall comps in China to be similar during FY16 to the trend in Q4,” the Piper Jaffray report added.

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