Coach, Inc., a leading marketer of modern classic American accessories, today announced a 49% increase in earnings per diluted share for its fourth fiscal quarter ended July 2, 2005. This substantial increase in earnings from the prior year's fourth quarter reflected 24% growth in net sales combined with significant operating margin improvement. For the full fiscal year, net sales rose 29% and net income increased 48% versus the prior fiscal year.
The prior year's fourth fiscal quarter included an additional week and therefore, on a 13-week to 13-week basis, sales rose 31% and earnings per share rose 58%. Similarly, on a 52-week to 52-week basis, sales rose 31% for the fiscal year, while earnings per share rose 49%.
In addition, on July 1, 2005 the company completed the purchase of Sumitomo's 50% interest in Coach Japan, Inc. for approximately $225 million plus undistributed profits and paid-in capital of about $75 million.
During the fourth quarter, net sales were $419 million, 24% higher than generated in the prior year's fourth quarter. Net income rose 49% to $98 million, or $0.25 per diluted share, compared with $66 million, or $0.17 per share in the prior year. This was ahead of the analysts' consensus estimate of $0.24 for the quarter. For the fiscal year 2005, net sales were $1.7 billion, up 29% from the $1.3 billion recorded in fiscal year 2004. Net income rose to $389 million, up 48% from the $262 million earned in the prior year. Diluted earnings per share rose 47% to $1.00, versus $0.68 a year ago, and ahead of analysts' estimates of $0.98. Earnings per share numbers have been adjusted for the two-for-one split, which was effected on April 4, 2005.
Lew Frankfort, Chairman and Chief Executive Officer of Coach, Inc., said, “Once again, I'm delighted with our fiscal fourth quarter and full year performance. This quarter's results demonstrated a continuation of the broad based strength we have seen throughout the year, as our market share continued to expand across all channels and geographies. Similarly, fiscal 2005 was another remarkable year for our company, as we posted excellent financial metrics throughout our businesses. Our performance reflects the sustainability of our growth strategies and the distinctiveness of our accessible luxury proposition, which continues to be embraced by our loyal consumer base in North America and internationally.”
In the fourth quarter, gross margin increased by 90 basis points on a year-over-year basis from 76.7% to 77.6%, while gross margin for the year expanded from 74.9% to 76.6%, a 170 basis point increase. This annual improvement was driven by channel mix, product mix and sourcing cost initiatives.
As expected, SG&A expenses as a percentage of net sales were level with prior year in the fourth quarter, at 43.8%. For the full year, SG&A expenses as a percentage of net sales declined to 40.3% from 41.3% a year ago. The operating margin in the quarter reached 33.8%, compared with 32.9% in the year-ago fourth quarter. For the full year the company's operating margin rose to 36.4% from the 33.6% margin achieved in fiscal year 2004, a 280 basis point improvement.
Coach also noted that the buyout of its joint venture partner in Coach Japan at fiscal year end allowed the company to capture a foreign tax benefit for the year. This benefit was recorded in the fourth quarter and brought the full year to the lower effective appropriate annual rate. The company also noted that this benefit, associated with the tax structure in Japan for income earned and reinvested in-country, will be ongoing.
At the end of the fiscal year the company had cash and marketable securities of $505 million, as compared with $564 million a year ago. It should be noted that the 2005 fiscal year end cash balance reflects the buyout of Sumitomo's interest in Coach Japan and the repurchase of $265 million of Coach stock during the fiscal year.
Fourth fiscal quarter and full year sales grew in each of Coach's primary channels of distribution as follows:
– Direct to consumer sales, which consist primarily of sales at Coach stores, rose 26% to $245 million during the fourth quarter from $195 million posted for the fourth quarter of the prior year. These exceptional results were driven by both same store sales increases and distribution growth. Comparable store sales rose 22.0%, with retail stores up 13.6%, and factory stores up 34.7%. For the full year, direct to consumer sales rose 29% to $935 million from $726 million generated in fiscal 2004. Overall, comparable store sales for the fiscal year increased 18.2%, with retail stores up 14.1% and factory stores up 23.9%.
– Indirect sales increased 21% to $174 million in the fourth quarter from the $144 million reported for the prior year. For the year, indirect sales rose 30% to $775 million, up from $595 million recorded for fiscal 2004. Results for both the quarter and fiscal year reflected strong gains in all indirect businesses, including Coach Japan, U.S. department stores and International wholesale. For the fourth quarter Coach Japan sales rose 20% in constant currency, while for the full year, sales increased 30%. On a comparable 13- and 52-week basis, yen sales in Japan rose 28% and 32%, in the quarter and for the year, respectively. As expected, comparable location sales in Japan rose at a mid-single-digit rate for the quarter and for the year.
Mr. Frankfort added, “The strength of our fourth quarter results was reflected in all of our businesses. Our successful fresh and fun offerings drove our performance as we continued to improve productivity through monthly product flow and innovation. Introductions this spring included Vintage Signature Tie Dye and Straw Boxy Totes. Optic Signature was offered for the first time in sophisticated Soho silhouettes in new colors. We also introduced an expanded shoulder tote group and a fresh interpretation of the ever popular Signature Patchwork. Lastly, Hamptons Weekend, in its third successful year, was updated and expanded with new colors and silhouettes, including Signature Scribble.”
“In addition, our surging factory store business reflects a combination of a strengthened merchandising offering, Coach's unique positioning and the overall vitality of the premier centers in this channel.”
“In Japan, we were particularly pleased with the outstanding sales and market share growth in FY05, which we achieved despite a lackluster environment. Our rapidly expanding sales in Japan truly reflect the success of our distribution strategy – notably the acceleration of flagship openings, along with the expansion of highly productive shop-in-shops.”
During the fourth quarter of fiscal 2005, the company opened seven Coach retail stores and two factory stores, while closing one factory location, bringing the total to 193 retail stores and 82 factory stores at July 2, 2005. This was a net increase of 19 Coach retail stores from the 174 in operation a year ago. Also during the quarter, the Ala Moana retail store in Hawaii was expanded, bringing the total number of completed retail store expansions this year to seven. Coach Japan opened two new locations, and closed two, bringing the total to 106 at fiscal year end. This was a net increase of four locations from the 102 at year-end 2004. In addition, we expanded two locations during the fourth quarter, bringing the year end total to 14 expansions in Japan.
“While fiscal 2006 has just begun, our momentum continued through July. We're confident that our proven growth strategies built upon our strong business and brand equities, will continue to deliver excellent returns in the seasons ahead and over our planning horizon,” Mr. Frankfort concluded.
The company introduced its first fiscal quarter outlook with sales targeted to be at $440-$445 million, an increase of at least 28%, and earnings per share projected to be at least $0.24, a gain of at least 40%. This compares to the consensus earnings estimate of $0.23 for first quarter.
In addition, Coach raised guidance for fiscal 2006 and now estimates sales of nearly $2.1 billion for the year, an increase of about 22%. Operating income is expected to rise at least 25% to an operating margin of over 37%. Earnings per share are forecasted to rise to at least $1.24, ahead of the analysts' consensus of $1.21 for the year.
This guidance excludes the earnings impact from the implementation of accounting for share-based payments (Statement of Financial Accounting Standards No. 123R), which is currently required in the first quarter of fiscal year 2006.