Handbag maker Coach's retreat from department stores hits outlook

By Siddharth Cavale

(Reuters) - Coach Inc's full-year revenue forecast missed Wall Street estimates as the handbag maker's strategy to limit exposure to the troubled department store sector takes a toll 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 a steeper drop in gross margins and reported lower-than-expected sales for its latest quarter.

Coach and other luxury accessories retailers, including Michael Kors Holdings Ltd , have been trimming sales to department stores - where over-reliance on discounting has become the norm - in order to sell them at full price through their own stores to help retain the brand's premium cachet.

The company is also curbing online flash sales and reining in promotions at Kate Spade, which Coach acquired for $2.4 billion last month.

Coach's profits nearly doubled in the fourth quarter, helped by a lower tax rate, but gross margins fell to 66.5 percent from 67.8 percent a year earlier.

Higher promotional activities at its outlet stores, where the company offers steeply discounted products, coupled with higher input costs eroded margins.

"There has been concern that too much outlet exposure and the continued promotional environment at outlets ... buying Kate Spade, which has a pretty big outlet business, and talking about expanding that (are) some of the concerns you are seeing this morning," Edward Jones analyst Brian Yarbrough told Reuters.

CFO Kevin Wills said he expected pressure on gross margins to ease in the current quarter, but warned that operating margins would fall in the mid-to-high single digits, in part due to variability in Kate Spade's business during the integration as well as currency fluctuations.

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

"The Street is believing that we are conservative in our outlook, but we believe that it is the right guidance to give," Chief Executive Victor Luis told Reuters.

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.

In contrast, Kors lifted its revenue forecast for its year ending March after reporting quarterly sales that beat estimates.

Net sales at Coach fell 1.8 percent to $1.13 billion in the fourth quarter, missing the average analyst estimate of $1.15 billion.

Excluding items, the company earned 50 cents per share, beating estimates by 1 cent.

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