Coach, Inc., a leading marketer of modern classic American accessories, today announced a 51% increase in earnings per diluted share to $0.23 for its third fiscal quarter ended April 2, 2005. This substantial increase in earnings from the prior year's third quarter reflected a 33% gain in net sales combined with operating margin improvement. In addition, the company announced 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. The purchase is expected to close at the end of the current fiscal year and be accretive to earnings in FY06.
In the third quarter, net sales were $416 million, 33% higher than the $313 million reported in the same period of the prior year. Net income rose 53% to $89 million from $58 million a year ago, and earnings per share increased 51% to $0.23 compared with $0.15 the prior year. These results were ahead of the analysts' recently revised consensus estimate of $0.22 per share. 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, “Our excellent third quarter sales reflect the sustainability of our growth and the strength of our business model. These results again demonstrate the vitality of the Coach brand. Clearly, our accessible luxury proposition of product innovation, relevance and exceptional value resonates with consumers across multiple channels and geographies. Further, our bottom-line performance evidences our ability to drive continued gains in profitability.”
During the quarter, gross profit rose 37% to $325 million from $238 million a year ago. Gross margin expanded by 220 basis points from 75.9% to 78.1%, driven by channel mix, product mix and sourcing cost initiatives. SG&A expenses as a percentage of net sales declined to 43.0%, a 60 basis point decrease from the 43.6% reported in the year-ago quarter, primarily due to leveraging the higher sales.
For the nine months ended April 2, 2005, net sales were $1.29 billion, up 31% from the $983 million reported in the first nine months of fiscal 2004. Net income rose to $291 million, up 49% from the $196 million reported a year ago.
Third fiscal quarter sales results in each of Coach's primary channels of distribution grew as follows:
Direct to consumer sales, which consist primarily of sales at U.S. Coach stores, increased 30% to $209 million from $160 million last year. Comparable store sales for the quarter rose 19.3%, with retail stores up 12.9% and factory store sales up 28.5%.
Indirect sales rose 36% to $207 million from $153 million in the same period last year. All indirect businesses, including Coach Japan, U.S. department stores, international wholesale and special markets, contributed to this significant increase. Sales at Coach Japan increased by 35% in constant currency, driven by new store openings, expansions and high-single-digit sales gains in comparable retail locations.
Mr. Frankfort added, “Our exceptionally strong results this quarter are a continuation of the trend we have seen over the last several years. Our business has been fueled by product innovation – punctuated by monthly flow. In fact, while consumers have always seen Coach as a leading handbag and accessory resource, increasingly many of our customers come to Coach as a resource for the newest styles, similar to the way they seek out the latest innovations in technology. This season's colorful offerings, driven by handbags and women's accessories, have drawn an enthusiastic response from consumers. We're particularly pleased with the ongoing strength of the Soho and Hamptons handbag collections across multiple fabrications and new silhouettes. Last month, we also introduced a significantly expanded and updated Hamptons Weekend collection, including new handbag styles and the whimsical Scribble print, which was instantly successful.”
“Our results in Japan were also excellent, as our market share continues to grow rapidly. Of special note, earlier this month, we received a terrific reception at the opening of our newest Japanese flagship, located in Nagoya. This 7,800 square foot store is our seventh flagship in Japan and our first in Nagoya. We also enjoyed an amazing response to our charity concert in Tokyo earlier this month, broadening our consumer appeal.”
During the third quarter of fiscal 2005, the company opened one Coach retail store and closed one factory store, resulting in a total of 186 retail stores and 80 factory stores at April 2, 2005. Through Coach Japan, one location was added, while as expected, three small shop-in-shops were closed.
“We're well positioned to sustain accelerated growth through the rest of this quarter, as our business this month has continued strong throughout all channels. As always, we have a strong pipeline of fresh and relevant products planned. This month we launched a new line of straw totes which were very well received by consumers. In addition, our Optic Signature fabrication was introduced in yellow, pink and green in several strong-selling Soho handbag styles, as well as in footwear, scarves and hats. Already a success, Optic Signature will also be our feature for Mother's Day. In May, we will be launching a new summer program including fresh interpretations of the Shoulder Tote, a very successful shape from last year's spring collection. Coming in June will be a new Vintage Signature Tie Dye and Patchwork group, the latter a perennial favorite. Also in the fourth quarter, we will be adding seven more retail stores in the U.S., bringing the total to 19 new retail stores in fiscal 2005.”
Mr. Frankfort concluded, “Looking ahead, we've never felt more positive about our prospects for growth, which rest on our distinctive proposition, strong brand equities, and expanding market share.”
The company now estimates 2005 sales of over $1.7 billion for the full fiscal year ending July 2, 2005, an increase of about 29% from prior year, and earnings per share of at least $0.97 or up 43% from last year, compared with analysts' current consensus estimate of $0.95. This reflects sales of at least $415 million and earnings per share of at least $0.23 for the fourth quarter, up 35% from the $0.17 reported for the 14-week quarter in fiscal 2004 and above the analysts' consensus estimate of $0.22. For fiscal 2006, we expect sales growth of at least 19% to at least $2.0 billion, and earnings per share growth of at least 22% to least $1.18, compared with analysts' current consensus estimate of $1.13.
It should be noted that 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 expected to be required in the first quarter of fiscal year 2006.