Coach Inc. on Wednesday reported weak holiday-quarter results and unveiled a new strategy for shoes and clothing, spooking investors with the notion that the days of strong demand for its premium leather handbags may be numbered. The company's shares tumbled 16%.
The company's prescription for re-igniting drooping sales in North America, its biggest market by far, calls for it to become a "head-to-toe" lifestyle brand by moving further into segments where it is a minor player, including shoes and clothing.
Shares of Coach, which also missed earnings estimates by a nickel, sank $9.93, or 16 percent, to close at at $50.75 in New York, slashing the company's market value by nearly $2.7 billion.
Wall Street, long accustomed to seeing Coach post large sales gains – company revenue rose 14.5 percent last fiscal year – was unimpressed, seeing the redefinition of a 72-year-old brand a venture fraught with risk.
"It means management thinks the core (business) can't grow," Morningstar analyst Paul Swinand told Reuters, saying the new strategy could hurt the brand since footwear is not its forte.
Comparable sales in North America fell 2 percent during the holiday quarter, only the third decrease in 11 years. The company also forecast flat comparable sales there in the second half of its fiscal year.
Last fiscal year, they rose 6.6 percent.
In a bid to diversify away from handbags, Coach said it will "re-launch" its shoe section at 170 of its 356 stores in March, and has begun to install shoe "salons" to better showcase its footwear at a few flagship stores.
That will be followed by an increased offering of clothing, watches and jewelry, categories Coach already sells, and fancier presentation as part of a rebranding that will be more visible by the 2013 holiday season.
The idea is to broaden selections and present them more invitingly to face off against smaller but increasingly popular rivals like Michael Kors Holdings Ltd, privately-held Tory Burch, and Fifth & Pacific Cos Inc's kate spade, whose same-store sales rose 27 percent last quarter.
Those three brands all sell handbags, clothing and shoes.
Despite its reputation as a purveyor of affordable luxury, Coach has struggled to make headway into higher-end items and the company expects a bigger selection of shoes will help handbag sales.
"There is a very substantial opportunity in this space over $400 where we are barely participating," Chief Executive Lew Frankfort told analysts on a conference call.
"We see footwear as a real traffic driver," Frankfort said.
While good news in theory, that will take valuable time and money to pull off, analysts said.
"We think this strategic shift is a positive move and potentially a high-reward strategy that will take significant time and investment to accomplish," said Omar Saad, Senior Managing Director of ISI Group.
TRAFFIC DROP-OFF
Business at its own full-service stores and factory outlets, which sell less expensive merchandise, was hit by fewer shoppers visiting malls and outlet centers in North America during the holiday season, when U.S. consumers across the income spectrum proved to be cautious about spending.
One Coach executive on a call with Wall Street analysts said he was surprised at how much discounting took place at department stores, particularly in December. Macy's Inc, Nordstrom Inc and Dillard's Inc are among stores that sell Coach products.
But Coach resisted pressure to offer more deals, preferring to protect both its margins and its brand image.
"Our modest growth was highly profitable," Frankfort told Reuters.
Overall revenue in Coach's fiscal second quarter, ended Dec. 29, rose 3.8 percent to $1.5 billion, missing analysts' average forecast for net sales of $1.6 billion, according to Thomson Reuters I/B/E/S. Revenue in Japan, Coach's No. 2 market, fell 2 percent, excluding the impact of a strong yen.
The holiday shopping season was weak for U.S. retailers, with sales rising 3.1 percent in November and December, according to the National Retail Federation, below forecasts. Even high end chains were not spared: high-end jeweler Tiffany & Co reported a drop in sales at its Fifth Avenue flagship store in New York.
Despite weak North American sales, there were bright spots for Coach. In China, still a small market but the cornerstone of Coach's international expansion, sales were up 40 percent in the latest quarter.
Coach said its push to build up its men's business, which includes wallets and briefcases, is paying off, with the company set to have sales in that segment rise 50 percent for the full fiscal year.
Net income in the second quarter was $352.8 million, or $1.23 per share, compared with $347.5 million, or $1.18 a share, a year earlier. Per-share earnings were 5 cents below the average Wall Street estimate.
© 2013 Thomson/Reuters. All rights reserved.