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Coach Crushed as Sales Fail to Impress

The Exchange

Add Coach (COH) to the list of retailers that had a disappointing holiday season.

Coach Store

The high-end seller of purses and tote bags reported a sluggish sales period for its fiscal second quarter, saying the economy overall and competition in the sector hurt its financials. As a result, the stock was having one of the worst single sessions in its history, sinking 15.4% to $51.33 Wednesday. According to FactSet data, at a decline of that level, the stock is set to record its fourth-biggest drop going back to the fall of 2000.

Evidence is continuing to mount that shoppers were hesitant to part with their cash as Christmas drew near, as a number of well-known chain merchants in sectors from apparel to games to jewelry have signaled a decided lack of consumer enthusiasm during the most important time of year for retail.

As for Coach, the sell-off in its stock came after the company posted quarterly sales of $1.50 billion. That was up 4% from last year, but it was the slowest rate of growth since 2008, when sales slipped 2% from the year before. Net income was $353 million, or $1.23 a share, vs. $347 million and $1.18 a share in the same period of the previous year. Both were weaker than expected, with analysts looking for earnings of $1.28 and revenue of $1.60 billion, according to FactSet.

Coach Sales

Source: Coach Inc.

Coach said its international division held up well during the quarter, but the bad news came from North America and offset any positives abroad. Domestically, the holidays were "challenging," which the company attributed to consumers' worries about the economy, merchandise promotions and competition for handbags. Coach didn't name names, but one of those it's going up against is the formidable Michael Kors (KORS), a retailer that's been public for only around a year (and up a whopping 127% since its first day of trade) but that's led on the creative side by its well-regarded namesake designer.

In North America, sales increased 1% to $1.08 billion, while same-store sales fell 2%. Turning to the bright spots overseas, international sales were up 12%, and in China, sales surged 40%. Still, North America is by far the biggest market for Coach, with 523 of its 833 stores at fiscal year-end and accounting for the bulk of its sales -- the U.S. brought in $3.2 billion of the $4.8 billion total revenue last year. When the home front is weak, that means trouble, even with strength elsewhere.

As noted above, Coach isn't the only store to offer anemic sales for the 2012 retail rush, nor is it by itself in the top-dollar area. Tiffany (TIF) said earlier this month that its comparable-store sales were flat during the holidays, sending its shares lower. GameStop (GME), Macy's (M) and Toys R Us also had less-than-impressive numbers, so it's appearing increasingly likely that any retailers who post legitimately encouraging results are going to be the exception rather than the rule.

Like every retailer, Coach needs the consumer to get in a better mood, and it's got to focus on differentiating itself from Michael Kors and others who want to take market share. Because expensive and in-demand fashion accessories are its reason for being, significant cutting of its prices to lure in more customers isn't an avenue Coach would willingly pursue. Consistent quality and name recognition are no small components to success here.

In the just-completed second quarter, it stuck to the plan of brand appeal. CEO Lew Frankfort pointed out in a press release that the company "maintained our pricing strategies despite the retail climate, protecting our brand proposition," and it's hard to see that strategy markedly changing anytime soon. That means it has to gear up for an ongoing fight and convince buyers its goods are better than the shop next door. Otherwise, it runs the risk of more quarters like this one, holidays or not.