Luxury retailer Coach (COH 41.15, -6.77 -14.1%) trades to near three-month lows this afternoon after what amounted to be a mixed Q4 report and lower than expected guide.
Simply put, COH barely beat market expectations for Q4 earnings, registering $0.50 per share. Revenues were down 1.8% compared to last year and were under market expectations at $1.13 billion. Net sales for the Coach brand totaled $1.05 billion for Q4 as compared to $1.07 billion in the prior year. Additionally, gross profit was $757 million on a non-GAAP basis and gross margins were 66.8% as compared to 67.8% last year.
COH’s Total North American Coach brand sales were $586 million versus $606 million last year, including $44 million associated with additional week of sales in the prior fiscal year. Both North American aggregate and bricks and mortar comparable store sales rose about 4%. As planned, sales at North American department stores declined about 40% at a POS and about 20% on a net sales basis as the company has now started to anniversary the pullback in shipments into the channel.
International Coach brand sales were $442 million as compared to $450 million last year, including about $32 million associated with additional week of sales in the prior fiscal year. Greater China sales increased 3% versus prior year in dollars and 7% in constant currency on a 13-week basis, driven by double-digit growth and positive comparable store sales on the Mainland, offset, in part, by softness in Hong Kong and Macau while in Japan, on a 13-week basis, sales declined 3% in dollars and about 1% in constant currency. Further, Europe was very strong on a 13-week versus 13-week basis, driven by double-digit growth in the directly operated channels and benefiting from the planned shift in wholesale shipment timing as previously announced. As expected, international wholesale increased on a net sales basis due to shipment timing, while POS sales declined as weaker tourist location results offset domestic growth.
In the Stuart Weitzman brand, net sales were $88 million compared to $84 million in the same period last year. On a non-GAAP basis, gross profit totaled $52 million, while gross margin was 58.9% as compared to 55.2% in the prior year period.
Perhaps the driving force behind today’s losses though is the FY18 guidance. Comping in below market expectations, COH sees EPS for FY18 in the range of $2.35-2.40 on revenues also worse than expected between $5.8-5.9 billion. The company sees the Kate Spade deal adding more than $1.2 billion in revenues for the full year with organic growth in the low-single digit range.
In addition, COH is projecting operating income growth of 22% to 25% versus fiscal 2017 driven by mid-single digit organic growth, the acquisition of Kate Spade, and estimated synergies of $30-$35 million. These synergies are expected to offset in part the reduction in profitability from the strategic and deliberate pullback of Kate Spade wholesale disposition and online flash sales channels. Taken together, the Kate Spade business and resulting synergies are expected to contribute about $130-$140 million to operating income.
Despite beating market views on the bottom line for Q4, FY18 guidance, Q4 comparable store sales, net revenues and gross margins were a tad light. The Kate Spade deal also seems to be weighing on the outlook due to higher integration costs and lower than previously guided synergies level off expectations.