Coach's turnaround strategy weighs on forecast, shares slide

By Siddharth Cavale

REUTERS - Coach Inc forecast full-year revenue below Wall Street estimates as the handbag maker's efforts to pull out products, including those of recently acquired Kate Spade, from department stores weigh on sales, sending its shares tumbling 14 percent.

The company's shares, up nearly 37 percent this year, fell to $41.20 in morning trading on Tuesday after Coach also posted lower-than-expected sales for its latest quarter.

Coach's 50 cents per share profit beat estimates by 1 cent, largely powered by a lower tax rate in the fourth quarter.

Excluding the tax rate benefit, profit was an about 5 cent to 7 cent miss to Street expectations, RBC Capital Markets analyst Brian Tunick wrote in a note, adding tax rate appears to have saved earnings.

Coach and other luxury retailers, including Michael Kors Holdings Ltd, have been reducing markdowns and pulling products off department stores, where discounting has become the norm, to sell them at full price through their own stores to retain brand exclusivity.

Net sales at North American department stores declined about 20 percent in the quarter ended July 1, a year after Coach first started to dial back its involvement with department stores.

Coach, which acquired Kate Spade & Co last month, had said it would cut down the smaller rival's sales to department stores and curb online flash sales in line with the company's turnaround strategy.

"There will be some short-term pressure as Coach pulls Kate Spade back from wholesale and its exposure to unfavorable channels as well as reduces the number of flash sales," Neil Saunders, managing director of GlobalData Retail, said in an email.

Coach forecast revenue of $5.8 billion to $5.9 billion for its fiscal year ending June 2018, with Kate Spade contributing over $1.2 billion. The company said it expected earnings of $2.35-$2.40 per share.

Analysts on average were expecting a profit of $2.49 per share and revenue of $6.04 billion, according to Thomson Reuters I/B/E/S.

Some analysts termed the forecasts conservative.

"Coach management may be providing somewhat conservative guidance on the underlying Coach business," Consumer Edge Research analyst David Schick wrote in a note.

In contrast, Kors lifted its revenue forecast for its year ending March 2018 after the company beat estimates, helped by fewer markdowns and higher sales of premium handbags.

Coach said its net income nearly doubled to $151.7 million, or 53 cents per share, in the quarter.

Net sales fell 1.8 percent to $1.13 billion, missing the average analyst estimate of $1.15 billion.

(Reporting by Siddharth Cavale and Uday Sampath Kumar in Bengaluru; Editing by Maju Samuel and Sriraj Kalluvila)