As has become the norm for Coach (COH), shares of the handbag and fashion accessory maker experienced heightened volatility after it reported lackluster results for its fiscal year 2013 fourth quarter. Revenue increased 6% year-over-year to $1.2 billion, slightly below consensus estimates. Earnings per share advanced just 3% compared to the same period last year, coming in at $0.89 (after adjusting for one-off items). Free cash flow for the fiscal year was strong at $1.2 billion, an increase of 20% compared to the prior year and equal to 24% of total revenue.
One thing is certain at Coach -- the core North American business likely won't be the same growth driver it has been in years past. Fourth quarter revenue in North America grew only 6% year-over-year to $825 million as same-store sales declined 1.7%. In our view, Coach is no longer "standing alone" as the aspirational brand of choice in the US. Now, it must share that title with younger brands such as Tory Burch, Fifth and Pacific's kate spade (FNP), and Michael Kors (KORS). In fact, some of CEO Lew Frankfort's commentary about how well its men's business is doing leads us to believe the core women's business at Coach is really struggling:
"…our men's business grew almost 50% in FY13 to about $600 million as we continued to open dedicated standalone and dual gender locations globally while also rolling out a broader expression of men's through additional North American retail stores."
Total revenue growth at Coach was about $312 million during fiscal year 2013, so the above statement implies that the men's business accounted for $200 million of revenue growth, meaning women's revenue increased only 2.5% year-over-year (certainly not what investors have experienced over the past several years at Coach).
Although Coach indicated recent executive departures were voluntarily, the firm announced North American President Mike Tucci and Chief Operating Officer Jerry Stritzke are leaving at the end of August. Their replacements are all internal hires who are stepping up the ladder. To replace the recently departed Reed Krakoff, Coach hired Stuart Vevers -- a long-time luxury designer who could spruce up Coach's product offering.
Speaking of Krakoff, Coach announced he will purchase his namesake brand from Coach for an undisclosed sum. This could be a nice move for Krakoff as his brand gains momentum in the luxury space, but we doubt it materially impacts Coach.
Internationally, sales increased 7% (17% excluding currency) year-over-year to $386 million in the fourth quarter, led largely by 35% sales expansion in China that was accompanied by double-digit same-store sales growth. Full-year sales exceeded $430 million, equivalent to 8% of total revenue. However, Coach is anticipating sales of $530 million (up 23% year-over-year), which lags new store square footage growth of 25%. We are a little disappointed by this figure and hope management is simply providing the market with conservative guidance -- especially since the firm anticipates strong same-store sales growth.
With the core women's brand clearly slowing in the US, Coach will have to pursue additional product lines to jumpstart growth. However, we'd like to see what Coach may come up with before we rush to judgment about the future of new product lines. At this time, however, we do not believe Coach warrants a position in our Best Ideas portfolio.