Financial Desk: Coach Fights Back with Q2 Growth and Upped Guidance

Despite ominous downgrades from a Goldman Sachs analyst
last week, Coach seems to be  coming out swinging
following an impressive second quarter in which the leather goods company posted increases across top and bottom line ledgers.

Earnings climbed 11% to $252.3 million, or 70 cents a share, for quarter ended Dec. 29, while sales jumped a strong 21% to $805.6 million. Gross profits, however, slid almost 174 basis points to roughly 75% of sales, and inventories jumped 20% to $300.7 million.

Those latter slides might be attributable to the current luxury market weakness as consumers tighten their purse strings—for more on that, check out my "Mass Affluents Retreat En Masse" story from earlier this week—which seems to be supported also by Chairman and CEO Lew Frankfort's (pictured, above, right) statements about weakness in comp store sales.

"Specifically, North American comparable store sales were impacted by weak mall traffic and an unexpected decline in average transaction size," he said, in a statement. "The macro environment appeared to cause a shift by many consumers to lower price point items. Conversion remained very strong, offsetting the bulk of weakness."

Looking ahead, the company actually upped its earnings and sales guidances, with revenues pegged at $3.15 billion (a 20% boost), and share value of $2.06 (a 22% gain). Still, given the challenges in the U.S. environment, Frankfort said that the company would remain cautious in providing forecasted estimates of comp store sales—which he added represent roughly 20% of overall retail sales for the back half of the fiscal year.

Another way to offset any slowdown in the U.S. market might be the brand's boosted efforts in China, where it will open a new global flagship store in Hong Kong this summer.

"This flagship will significantly enhance the Coach brand and is consistent with our strategy of raising awareness and aggressively growing market share with the Chinese luxury  consumer," Frankfort said, in a statement. "Clearly, Greater China has the potential, during hte next few years, to become the third major market for Coach, following North America and Japan."

International markets currently represent about 25% of Coach brand sales.

No word yet on any ad changes at the company, though Frankfort emphasized that the challenging retail climate has the company "embarking on a comprehensive review of all ways in which the brand touches the consumer," and said the new positioning will become more clear as the company shifts into the 2009 fiscal year.

The brand boosted its ad spend by roughly 31% during Jan.-Nov. 2007, growing to $13.2 million, versus $10.1 million from Jan.-Nov. 2006, per Nielsen Monitor-Plus.