Coach Q2 net sales up 4 percent, maintains FY16 outlook

Coach second quarter net sales for the period ended December 26, 2015 totaled 1.27 billion dollars, compared with 1.22 billion dollars reported in the same period of the prior year, an increase of 4 percent. On a constant currency basis, total sales increased 7 percent for the period.

Commenting on the results, Victor Luis, Chief Executive Officer of Coach, said, “We are very pleased with our second quarter performance. We drove further sequential improvement in our North America bricks and mortar business - led, as expected, by our retail stores, while our outlet store channel also strengthened against a backdrop of lower tourist traffic and a highly promotional environment. Our international businesses posted strong growth on a constant currency basis, highlighted by double-digit increases in Europe, and Mainland China, as well as sales gains in Japan.”

Second quarter highlights

Gross profit totaled 859 million dollars versus 841 million dollars a year ago on a non-GAAP basis, while gross margin was 67.4 percent versus 69 percent. On a reported basis, it was also 859 million dollars versus 840 million dollars, with a gross margin of 67.4 percent versus 68.9 percent.

Operating income for the quarter on a non-GAAP basis totaled 285 million dollars compared to 299 million dollars in the prior year, while operating margin was 22.4 percent versus 24.5 percent. On a reported basis, operating income was 261 million dollars compared to 275 million dollars in the prior year, while operating margin was 20.5 percent versus 22.6 percent.

Net income on a non-GAAP basis totaled 188 million dollars, with earnings per diluted share of 0.68 dollar. This included a contribution of 13 million dollars or 0.05 dollar per share from Stuart Weitzman. On a GAAP basis, net income was 170 million dollars with earnings per diluted share of 0.61 dollar including a contribution of 12 million dollars or 0.04 dollar per share from Stuart Weitzman.

Coach brand net sales down 3 percent

Net sales for the Coach brand totaled 1.18 billion dollars compared with 1.22 billion dollars reported in the same period of the prior year, a decrease of 3 percent. On a constant currency basis, total sales decreased 1percent for the period. Total North American Coach brand sales decreased 7percent on a reported basis to 731 million dollars from 785 million dollars last year, and decreased 6 percent on a constant currency basis. North American direct sales declined 7 percent on a dollar basis and 6 percent on a constant currency basis for the quarter, with comparable store sales down 4 percent including the impact of the Internet, which pressured total comparable stores sales by about 1 percentage point due to the reduction in eOutlet events. As expected, at POS, sales in North American department stores declined at a mid-single-digit rate versus prior year, while net sales into department stores declined to a similar degree.

International Coach brand sales rose 4 percent to 437 million dollars from 421 million dollars last year. On a constant currency basis, International sales rose 9 percent. Total China sales rose 2 percent in dollars and 5 percent 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 2 percent on a constant currency basis, while dollar sales declined 3 percent, reflecting the weaker yen.

Sales for the remaining directly operated businesses in Asia grew modestly in constant currency but declined 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 increased slightly, driven by strong domestic performance offset in large part by relatively weak tourist location results.

Gross profit for the Coach brand totaled 799 million dollars on both a non-GAAP and reported basis, while gross margin was 67.7 percent, pressured by about 110 basis points from currency.

Stuart Weitzman second quarter results

Net sales for the Stuart Weitzman brand totaled 94 million dollars for the second fiscal quarter. Gross profit totaled 61 million dollars on both a non-GAAP and reported basis, resulting in a gross margin of 64.3 percent. Operating income was 22 million dollars representing an operating margin of 23.6 percent on a non-GAAP basis, and 18 million dollars or 19.4 percent as reported.

“We were also excited about Stuart Weitzman’s results during the quarter, which exceeded expectations. Boots in particular sold well, notably in domestic retail stores, and in spite of the unseasonably warm weather. Importantly, we are effectively integrating Stuart Weitzman to Coach, Inc. while continuing to successfully execute the Coach brand transformation,” Luis added.

FY16 revenue outlook maintained

The company is maintaining its fiscal 2016 constant currency revenue growth and operating margin guidance for the Coach brand, while raising its consolidated operating income outlook based on second quarter results. Coach brand revenues are still expected to increase by low-single digits in constant currency on a 52-week basis. However, based on current exchange rates, foreign currency is now expected to negatively impact overall revenue growth by 225-250 basis points.

Coach brand operating margin for the year is still estimated to be in the mid-to-high teens with some shift between the gross margin and expense ratio from previous annual guidance. To this end, gross margin for the Coach brand is projected to be in the range of last year’s margin of about 69½ percent on a constant currency basis, while negative foreign currency effects are now projected to impact gross margin by 90-100 basis points.

In addition, based on Stuart Weitzman’s sales and margin outperformance during the holiday quarter, the company is now forecasting revenue for the brand to be in the area of 340 million dollars on a reported dollar basis for fiscal 2016, driving Coach, total revenue growth to high-single digits on a constant currency basis and adding about 0.12 dollar to earnings per diluted share. Overall, the Stuart Weitzman business is now projected to negatively impact consolidated gross margin and operating margin by about 70 basis points and approximately 20 basis points, respectively – an improvement from previous guidance.