Shares in Coach (COH) fell 10 per cent as analysts cut EPS forecasts for 2013-14 when the New York-based luxury accessory retailer reported its full-year results last week.
Solid growth in international markets was partly offset by a slower performance in North America, with Coach now projecting only modest growth in the 2014 financial year. Management also indicated that it was "disappointed" with performance in the ladies handbag category, as same-store sales in North America contracted 1.7 per cent in the final quarter.
But if the figures missed their mark, they still amounted to a strong set of results, and we firmly believe that the company's growth prospects are robust. Sales rose 8 per cent in constant currency to $5.1bn (£3.3bn), with North American sales up 5 per cent and international sales up 15 per cent to $1.5bn. In China, revenue jumped 40 per cent to $430m and comparable store sales rose at double-digit pace. Sales in the men's business, a relatively new venture, grew nearly 50 per cent to $600m.
Profits were equally strong, with adjusted EPS rising 6 per cent to $3.73. Adjusted operating profit rose 2 per cent to $1.58bn, against a slight margin contraction to 31.1 per cent, but the gross margin edged up to 73 per cent - impressive for a retailer. Free cash flow grew 20 per cent to $1.2bn, while the net cash pile swelled from $894m to $1.13bn, despite $400m of share repurchases.
During the year Coach continued to expand globally by opening several new locations, notably in China. Shortly after the year-end, it acquired the remaining interest in its Coach Europe joint venture, so it now controls 18 locations across Europe.
Meanwhile, the Reed Krakoff business was sold off and management announced plans to close roughly 16 underperforming full-price stores in North America. But these are stores whose leases have come to an end and which are located close to another Coach outlet. In fact, it's all part of a company-wide efficiency drive to streamline the business and use the savings to fund Coach's transformation into a "global luxury lifestyle brand" - a programme that will continue into 2014. This initiative is sensible as market share in North America is plateauing. The idea is for Coach to emerge as a global brand, and given its under-penetration in most markets outside the US and the cash-rich, well-run nature of the business, this goal is certainly within reach and offers real potential for growth - as well as tasty returns for shareholders.
