Coach reported a fiscal Q1 sales increase of 1% to $1.04 billion, missing the FactSet consensus for $1.07 billion, as the upscale accessories retailer continues its efforts to pull out of hundreds of U.S. department stores and extricate itself from heavy promotional environments and off-price competition.
Coach's North American brand sales fell 3% to $545 million in fiscal Q1, compared to $561 million in the same quarter last year. Brick-and-mortar same-store sales rose 4%, or 2% when e-commerce was factored in, due in part to the company's restriction on discounts through its flash-sale site, while North American department store sales fell 30%.
Coach posted Q1 adjusted earnings of 45 cents per share, in line with the FactSet consensus, and the company maintained its guidance for its full fiscal 2017 year.
Coach has been seeing encouraging results in recent quarters after tamping down outlet sales and department store sales, which includes rampant discounts as those retailers struggle to drive traffic back into stores. Those pullbacks undermined the first quarter of Coach’s fiscal 2017 year, but CEO Victor Luis said the company is "pleased" with its results, citing positive comparable store sales in North America and international growth.
"We remained focused on elevating the perception of the Coach brand through compelling product, differentiated store environments and emotional marketing," Luis said in a statement. "At the same time, we implemented the strategic actions necessary to reposition the brand and streamline our distribution in the promotional North American department store channel. Despite this deliberate pullback, we achieved growth across key financials, including sales, gross profit and operating income, as well as double-digit earnings growth.”
Some analysts agree that Coach will eventually profit from the move away from department stores.
“After last quarter’s strong performance, there is no denying that today’s results from Coach indicate a loss of momentum,” Conlumino CEO Neil Saunders wrote in a note emailed to Retail Dive. “[T]he numbers reflect the ongoing changes that Coach is making in its core North American business and, as such, remain those of a company in transition. A core part of the sales slide, for example, is the deliberate withdrawal from department stores in the U.S., where sales dropped by 30% over the prior year. As much as this has a painful impact on top-line performance, the impact on the rest of the business and brand is actually positive.”
In order to regain its reputation as an upscale brand, Coach must continue to withdraw from its dependence on lower-priced outlet sales and discounts, which hurt its margins and damaged its overall image. However, in a retail environment where luxury sales have been hit on the manufacturing and sales sides by the strong dollar and where off-price retail is among the few bright spots, that means that Coach is swimming against the current.
“The truth is that the department stores’ environments, service levels and discounting policies are increasingly out of kilter with the strategic priorities of Coach, and brands like it,” Saunders wrote. “Coach remains on the right path to rebuilding its brand image and enhancing profitability. While we expect sales growth to remain muted over the course of this year, a solid holiday quarter and some uplifts in the second half should lift top-line growth to nearer the 2% mark over the course of this fiscal year.”