Bag retailer Coach climbs as less discounting pays off

A move by US handbag retailer Coach to pull its products out of more than 250 department stores last summer is paying off.

The $11bn retailer, whose aura of exclusivity has in recent years been dented by the ubiquitousness of its products, saw its shares jump by the most in 15 months on Tuesday as lower inventory in mid-tier department stores translated into more full-priced sales at its own stores.

Same-store sales for North America – Coach’s biggest market – were up 3 per cent during the fiscal third quarter, which ended on April 1. The rise marks the fourth straight quarter of like-for-like sales gain for the company and tops the 1.4 per cent increase the market was expecting.

Shares in Coach, up more than 10 per cent so far this year, climbed as much as 9.1 per cent in early trading in New York – its biggest one day jump since January 2016.

The gain underscores Coach’s efforts to lessen its dependence on department stores for its sales and regain more pricing control over its products. As the likes of Macy’s struggled with weak traffic and online competition, many have resorted to aggressive storewide promotions and coupons. In the process, consumers have become conditioned to not paying full-priced for goods – not even for so-called luxury items.

While gross margin grew 1.9 percentage points 70.9 per cent during the quarter from the year ago period, Coach’s “shrinking to grow” strategy is not without its costs.

Revenue for the period fell 3.7 per cent to $995.2m as department store sales in North America dropped 40 per cent following the pullback. The market was expecting a smaller decline to $1.02bn.

Net income rose nearly 8 per cent however to $122m, or 43 cents per diluted share. Adjusted for one-off items, net income came in at $130m, or 46 cents per diluted share, ahead of forecasts for $125.9m or 44 cents a share.

“Our solid performance this quarter was very much in line with our expectations and our strategic initiatives,” said chief executive Victor Luis. “…despite our deliberate pullback in the North America wholesale channel and the impact of calendar shifts, we delivered earnings growth.”