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Coach Inc., Vince Taking Different Paths Toward Profitability

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In a challenging wholesale and retail environment, Coach Inc. saw increased profit margins in the third quarter ended April 1, while sales and earnings dipped.

There was a somewhat darker picture for fellow signature brand retailer Vince Holding Corp., which warned in its fourth quarter earnings report that “there is substantial doubt about the company’s ability to continue as a going concern” relating to its ability to comply with the “consolidated net total leverage ratio under its term loan facility.”

At Coach, Gross margin for the quarter expanded 190 basis points from prior year to 70.9%. Net sales decreased 4 percent to $995 million in the quarter, while gross profit fell 1 percent to $706 million.

The company noted the Coach brand’s repositioning in the North American wholesale channel through a reduction in promotional events and door closures negatively impacted sales growth by about 150 basis points in the quarter.

Victor Luis, chief executive officer of Coach, said, “Our solid performance this quarter was very much in line with our expectations and our strategic initiatives. In a volatile and complex global environment, we delivered continued positive comparable store sales for the Coach brand in North America and gross margin expansion in each segment, while tightly controlling costs. We continued to drive growth in our directly-operated Europe and Mainland China businesses, which represent the most significant geographic opportunities for our brands. And, despite our deliberate pullback in the North America wholesale channel and the impact of calendar shifts, we delivered earnings growth. Importantly, we announced a new leadership structure and strengthened our Coach brand team, a critical step in Coach, Inc.’s evolution as a customer-focused, multi-brand organization.”

Net income for the quarter increased 8 percent to $122 million, with earnings per diluted share of 43 cents compared to net income of $112 million with earnings per diluted share of 40 in the prior-year period. Operating income for the quarter rose 13 percent to $151 million, while operating margin increased to 15.2 percent to 13.

Net sales for the Coach brand fell 4 percent to $915 million in the period, with a 5 percent falloff in North America to $474 million. The company noted that as planned, sales at North American department stores declined about 40 percent. International Coach brand sales also declined 4 percent to $430 million compared to $448 million a year ago.

“While the retail environment remains uncertain, our strategic vision for our brands and our company remains clear,” Luis said. “The traction we’ve achieved to date on our transformation plan and the success of our integration of Stuart Weitzman give us continued confidence in our direction. Moreover, with our new leadership structure, Coach, Inc. is well positioned to continue its journey as a global house of brands and to focus on opportunities to drive long-term and sustainable growth.”

The company said it continues to expect revenues for fiscal 2017 to increase low-single digits, including the impact of currency. In addition, it is maintaining its operating margin forecast of 18.5 to 19 percent for fiscal 2017. This guidance incorporates the negative impact of Stuart Weitzman and the strategic decision to elevate the Coach brand’s positioning in the North American wholesale channel, including a reduction in promotional events and the closure of about 25 percent of doors.

Coach Inc. maintains its projection of double-digit growth in net income and earnings per diluted share for the year.

Vince

Vince, meanwhile, reported that net sales in the fourth quarter ended Jan. 28 had decreased 21 percent to $63.9 million from $81.8 million in the fourth quarter of fiscal 2015.

Operating loss was $62.9 million, which includes $55.1 million in non-cash long-lived asset impairment charges, compared to operating income of $4.8 million for the fourth quarter of fiscal 2015. Vince saw a net loss was $162.1 million, or $3.28 per share, compared to net income of $1.8 million, or 5 cents per diluted share, for the prior-year fourth quarter.

The company ended the fourth quarter with 54 company-operated stores.

“Results for the fourth quarter came in below our expectations, due primarily to challenges related to our systems conversion, which led to delayed shipments of spring product and off-price shipments, as well as lower than expected performance in our pre-spring collection,” CEO Brendan Hoffman, said. “Despite these recent challenges, we are encouraged by the improved performance we have seen in our direct-to-consumer channel in the first quarter, led by our e-commerce business, as a result of enhancements we have made to the web site and the positive response that we have driven with our marketing and social media efforts.”

Hoffman said 2016 was largely a year for Vince to reset and transition the business, “as we have made great strides to establish a foundation from which we can build Vince in a sustainable way.”

“As we look to 2017, we have made the prudent decision to suspend our sales and EPS guidance as we work to make our new systems more efficient and complete our business transition,” he added. “This decision to suspend guidance was further driven by the difficult retail environment in which we continue to operate. That said, we remain focused on expanding our direct-to-consumer business, optimizing our wholesale channel, and growing our international presence over the long-term.”

Vince’s gross profit was $29.2 million, or 45.7% of net sales, compared to gross profit of $41 million, or 50.1% of net sales, in the fourth quarter of fiscal 2015. The company said the decrease in the gross profit rate for the fourth quarter of 2016 reflected an increase in product costs, supply chain expenses, and allowances relative to the decrease in net sales, partially offset by a favorable impact from a channel mix shift and inventory reserves.

For the full year, net sales decreased 11.3% to $268.2 million from $302.5 million during prior year. The net loss was $162.7 million, or $3.50 per share, compared to net income of $5.1 million, or $0.14 per diluted share, in fiscal 2015.

Regarding the debt situation, Vince said its assessment did not take into account management’s plans to mitigate “such substantial doubt that could be reasonably possible of occurring but are not final, including discussions with lenders and with its majority shareholder on additional financing options and actions to improve the capital structure of the company.”

The company said it’s taking specific steps to remediate material weaknesses by implementing and enhancing control procedures.

“We believe that Vince remains a strong brand with a loyal customer following,” chairman Marc Leder, said. “While we recognize that the apparel industry remains challenging and there is still work to be done, we believe that the management team has made important strides in resetting the brand and we continue to support efforts to drive improved performance in the business.”

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