USA -- Coach Inc, a leading marketer of modern classic American accessories, reported sales of $740 million for its third fiscal quarter ended March 28, 2009, compared with $745 million reported in the same period of the prior year, a decrease of 1%.
Earnings per diluted share totaled $0.38 for the quarter, excluding a one-time charge of $0.026, compared to $0.46 per diluted share a year ago. Including this one-time charge related to certain cost reduction measures, earnings per share totaled $0.36. Net income excluding the one-time charge totaled $123 million compared with $162 million, a 24% decline. Including the one-time charge, net income totaled $115 million for the quarter.
The company also announced that its Board of Directors has voted to initiate a cash dividend, at an annual rate of $0.30 per share. The first quarterly payment, of $0.075 per share, will be paid on June 29, 2009 to stockholders of record as of June 8, 2009.
Lew Frankfort, Chairman and Chief Executive Officer of Coach Inc said, “The announcement today of the initiation of a dividend reflects our financial strength and our confidence in Coach’s business outlook. With a business model that generates significant cash flow and with virtually no debt, we are in a position to take advantage of profitable growth opportunities, while continuing to return capital to shareholders.”
As noted, during the quarter, the company recorded three one-time charges. These consisted of expenses related to the reduction of corporate staffing levels in the U.S., the closure of four North American retail stores and the closure of the company’s sample-making facility in Italy. In aggregate, these actions increased the company’s SG&A expenses by $13 million in the period and negatively impacted earnings by $8 million after tax. Combined with other key measures previously implemented, such as the elimination of merit-based salary increases and a hiring freeze outside of critical growth areas, the company now expects to capture over $50 million in total pre-tax savings next fiscal year.
Mr. Frankfort said, “We were pleased to generate top line results that were essentially even with prior year and encouraged by the stabilization of our comparable store sales to pre-Christmas levels in North America. Importantly, we enhanced the vibrancy of our franchise by providing our consumers with innovative, relevant product at a compelling value without going on sale in our retail stores. Our third quarter results demonstrate our resilience and ability to navigate through this challenging environment. In addition, the steps that we’re taking to reduce our expense structure will help position Coach to enhance our profitability.”
For the quarter, before one-time items, operating income totaled $199 million, down 23% from the $257 million reported in the comparable year ago period, while operating margin was 26.9% versus 34.5% reported for the prior year. During the quarter, gross profit declined 6% to $525 million from $558 million a year ago.
Gross margin was 71.0% versus 75.0% a year ago, impacted as expected by deeper factory store promotions, channel mix and our sharper pricing initiative in full price. SG&A expenses as a percentage of net sales, excluding one-time items, increased to 44.1%, compared to the 40.5% reported in the year-ago quarter. Including the impact of the one-time items, operating income totaled $185 million, the operating margin was 25.1% and the SG&A expense ratio was 45.9%.
Third fiscal quarter sales in each of Coach’s primary channels of distribution were as follows:
• Direct-to-consumer sales rose 9% to $634 million in the third quarter from $582 million last year. North American comparable store sales for the quarter declined 4.2%. In Japan, sales rose 1% on a constant-currency basis, while dollar sales rose 14%, reflecting the stronger yen year-over-year. China sales remained robust, as retail sales continued to comp at a double-digit rate.
• Indirect sales decreased 35% to $106 million in the third quarter from the $162 million reported for the prior year. This decline was primarily due to reduced shipments into U.S. department stores. The company continues to tightly manage inventories in that channel given lower demand. International sales at retail rose during the period, notably in locations focused on the domestic consumer, driven by distribution.
During the third quarter of fiscal 2009, the company opened two retail stores and closed two others, while opening three factory stores in North America, bringing the total to 324 retail stores and 109 factory stores as of March 28, 2009. In addition, one retail store and one factory store were expanded. In Japan, Coach opened one factory store, bringing the total number of locations in Japan to 161 at the end of the quarter.
“Our roadmap for long-term growth is intact. We remain committed to balancing our growth strategies with the appropriate level of caution around spending, given the environment. At the same time, we will continue to implement our distribution plans to capture the emerging market opportunity with a particular focus on China, where our brand is taking hold and the category is developing rapidly. To this end, we have just completed the acquisition of all Mainland China retail locations, taking control of our destiny in the region.
“In summary, Coach is financially solid and well positioned to manage through this economic downturn. We have a strong balance sheet, significant cash position, and, despite current lower overall consumer spending, we continue to grow our leading market share in the U.S. handbag and accessory category,” Mr. Frankfort concluded.
For the nine months ended March 28, 2009, net sales were $2.453 billion, up 2% from the $2.399 billion reported in the first nine months of fiscal 2008. Excluding one-time items, net income totaled $486 million, down 15% from the $570 million reported a year ago, while earnings per share declined 5% to $1.49 from $1.56. Including the impact of one-time items, net income for the nine months totaled $478 million and earnings per share were $1.46.
The company also announced that during the third fiscal quarter, it repurchased and retired 3.6 million shares of its common stock at an average cost of $13.98, spending a total of $50 million. At the end of the period, $710 million was available under the company’s repurchase authorization.