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Aspirational luxury brand Coach (NYSE:COH) recently announced lackluster results for its fiscal year 2013 second quarter and the holiday season. Revenue increased just 4% year-over-year to $1.5 billion, short of consensus expectations. Earnings missed the mark by several cents, growing just 4% year-over-year to $1.23 per share. Our fair value estimate remains unchanged.

Gross margins remained basically unchanged year-over-year at 72.1%, suggesting the company did not take markdowns during the quarter. Unfortunately, the firm's 4% sales expansion trailed the 15% increase in inventories, which could indicate that markdowns may come eventually. We could see a gross margin figure meaningfully lower than the current low-70's run-rate in the coming periods. Inventory growth was among the primary reasons why shares traded down so sharply following its earnings release, in our view.

The other sore spot of the quarter was Coach's North American results. Total sales increased just 1% in the region compared to the prior year to $1.08 billion, with same-store sales declining 2%. CEO Lew Frankfort provided several of the common holiday excuses from 2012:

The two overarching issues which impacted results, first was the muted consumer environment in the U.S. with a fiscal cliff uncertainty weighing on shoppers and a slow recovery from Hurricane Sandy in the Tri-State area. Second was intensified competition and heightened promotional activity in the women's bag and accessory category, especially in the weeks leading up to Christmas.

We aren't surprised to see the company blame the fiscal cliff, but we doubt it really impacted its middle-class consumer base. Competition, particularly from the likes of Michael Kors (NYSE:KORS) seems to be the real factor at play, in our view. We think the momentum behind the Coach brand is cooling, much like what we've seen happen at Tiffany (NYSE:TIF) in recent months. Although the firm will try to branch out into different products, we fear this could be the early innings of a long-term decline. Men's is certainly an interesting opportunity, but we think women leaving the brand could have a large impact on the men's business.

On the positive side, the brand experienced strong international strength. Revenue jumped 12% year-over-year to $411 million, driven by 40% sales growth in China and double digit same-store sales growth in the region. Coach plans to open 30 more stores in China during the 2013 fiscal year, with 10 more in the second half of calendar 2013. Sales are expected to total over $400 million. Though this growth route looks incredibly attractive, if the brand is losing momentum in the US, then consumers all over the globe could eventually share the same sentiment.

With results coming in relatively weak during the quarter, we remain cautious about Coach's future. Unlike luxury brands with long-established histories like Gucci and Burberry (OTCPK:BURBY), Coach has a mid-market, aspirational image, so it doesn't have the same resiliency. We'd like to see positive results resurface in the firm's core North American women's business before we become interested in adding the name to the portfolio of our Best Ideas Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Why Coach's Momentum May Continue To Slow

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