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Coach, Inc. (COH) on Tuesday announced fiscal third quarter sales and earnings results that missed Wall Street expectations, hurt by the continued strong dollar and the difficult domestic retail environment, sending the stock down by as much as 5 percent in morning trading.

The company has been working to elevate the brand in the mind of its consumers by reducing its reliance on discounting, improving product, and returning to its heritage of authenticity and craftsmanship.

Although the transformation has proven challenging in the highly promotional retail environment amid tough competition from Michael Kors, Kate Spade, Tory Burch and other affordable luxury brands, there are encouraging signs. Consumers are responding positively to new leather products, much of which is devoid of the heavily logoed styles of prior seasons.

Sales for the three months ending March fell 15 percent to $929 million from $1.1 billion in the prior year period prior year. Reported sales would have been 3 percent higher excluding the impact of currency. Analysts had been hoping for sales of $950 million.

Total North American sales decreased by 24 percent to $493 million from $648 million last year, as expected. North American direct sales declined 23 percent on both a total and comparable store basis including the impact of reduced promotional events, which pressured total comparable stores sales by about 11 percentage points. Sales in North American department stores declined about 30 percent versus the prior year, reflecting the elimination of Coach-specific promotional events from that year, while shipments into department stores declined similarly.

International sales decreased 3 percent to $428 million from $441 million last year, hurt by currency fluctuations. Sales in China actually rose 10 percent on a constant currency basis and 8 percent in dollars with positive comparable store sales and slower distribution growth. In Japan, sales declined 11 percent on a constant currency basis, better than expected due to tough comparisons and weak yen. Europe remained strong, growing at a double digit pace. 

Gross margin improved by 50 basis points to 71.6% of sales in the quarter, helped by the reduced promotions. SG&A expenses totaled 58.3% of sales on a reported basis, compared to 47.2% in the prior year period.

During the quarter, the company recorded charges of $23 million under its multiyear transformation plan. These charges consisted primarily of accelerated depreciation for renovations, lease termination costs related to store closures and organizational efficiency costs. The company closed a total of 43 retail stores and 12 outlet stores in North America in the quarter, bringing the total year-to-date closures to 56 and 13 closures, respectively.

For the quarter, reported operating income totaled $124 million, while operating margin was 13.3%.

Including charges, net income declined by 54 percent to $88 million, or $0.32 per share, missing Wall Street estimates, compared to $191 million, or $0.68 per share, in the prior year period.

For the year-to-date period, net sales were $3.19 billion, down 13 percent from the $3.67 billion reported in the first nine months of fiscal 2014. On a constant currency basis, sales declined 11 percent for the period. Reported net income for the nine-month period totaled $391 million, or $1.41 per share, compared to $706 million, or $2.51 per share in the prior year period.

The company also reported that it continues to reduce promotional impressions, a critical component of its brand transformation strategy. Its North America quarterly brand tracking survey showed further improvement among category drivers that Coach is perceived as less promotional, while brand affinities remained strong overall.

The company plans to focus on its aggressive remodel and store opening schedule in the fourth quarter, and to complete its $574 million acquisition of the Stuart Weitzman footwear business.

For the current fiscal quarter, the company expects continued revenue declines.

Coach stock has risen by almost 13 percent so far this year.

 

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