Coach Earnings Call Nuggets: the New Transformation Strategy and the Impact of Sandy

Coach, Inc. (NYSE:COH) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

The New Transformation Strategy

Robert Drbul – Barclays Capital: Lew, I have two questions for you. The first one, the new transformation strategy, is it a reaction to market conditions and really what do you hope to achieve with it?

Lew Frankfort – Chairman and CEO: First, Bob, we have been working for the last two years on moving Coach from an accessories brand to a lifestyle brand. We started with a holistic approach to men’s which is running extremely strongly. We have moved forward with footwear. We’ve introduced new store prototypes. We have expanded our lifestyle categories with key items, particularly in outerwear, all of which demonstrate consumers’ interest in Coach providing a more complete expression and based on the accumulation of a variety of factors including having the right team in place on success with our initiatives, business process change and an articulation of who the Coach Women will be through our lenses, we have now galvanized on this initiative and you’ll see this holiday a complete expression of the Coach brand. In essence, what we really want to is enable the consumer to see Coach in a more complete emotional context rather than seeing Coach as a great accessory or a great bag we want them to first think of Coach as a great brand on anklet and accessories, but through a lifestyle lens.

Robert Drbul – Barclays Capital: I have a second question, Lew. Within the holiday season, was there a variation between full-price comps and the outlet stores in North America?

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Lew Frankfort – Chairman and CEO: The short answer is no. There was a – the trends look very consistent. Both brick-and-mortar channels were impacted by lower traffic and we did not promote our way to positive comp which obviously – we had the marketing levers to do, but wanted to protect the brand composition.

The Impact of Sandy

Kimberly Greenberger – Morgan Stanley: I just had a follow-up on Bob’s question before I move on to my question. Lew, it sounds like you had negative traffic in both channels, and if you could just comment on the level of sort of couponing and discounting, obviously, we saw flat gross margins, so it looked to be relatively similar to last year. But I think there might have been some – an incremental discount, for example at the factory channel in December, if you could just comment on that.

Lew Frankfort – Chairman and CEO: The promotional activities look consistent with our last year in factory. What impacted us was overall mall traffic which was down during the month of December in particular.

Kimberly Greenberger – Morgan Stanley: Did you quantify the impact of Sandy? And then, just any initiatives here in the first half of – calendar 2013, your second half of your fiscal year. To move that comp from that negative 2 level back into the flat range, that would be helpful. Thank you so much.

Jane Nielsen – EVP and CFO: Yeah. Kimberly, just to answer your question, one, on the factory stores, in the second quarter, our factory store growth margin was flat to prior years, so we held our gross margin in our factory stores. Overall, Sandy was about 1 point of comp in North America in the second quarter. As we look at initiatives over the second half, we feel well positioned for spring. We’re overlapping our (no mask) in our factory channel in the coming quarters and Mike could also add some comments on comp.

Michael Tucci – President, North American Group: Sure. Well first, of course we recognized that we battle through a tough holiday season. We work on pushing the business, but we did limit some of our activities. Our approach to spring is really around very fresh inventory going into the spring season. A focus on women’s handbag and accessories as an opportunity to strengthen and within that leveraging underlying strength in the leather category and trying to offset the weakness that we’re seeing in non-leather mixed materials on logo through further innovation, more fresh delivery there and frankly rebalancing our inventory to push more emphasis on leather, where we see growth. Another opportunity to improve comp performance is clearly taking advantage of the digital space and the men’s opportunity which continue to be very, very strong for us. An area that we’re studying and we’ll take a little bit more time to understand is the impact of anniversarying (no mask) strategy in factory. It literally started today last year. So, as we get deeper into the spring season, I think we have some opportunity to be creative there to focus on merchandise opportunities within the factory channel against that backdrop. Then finally from a product standpoint, really focusing on shoes as a grow lever, as a frequency opportunity, as an opportunity to engage with the consumer and an extremely important category where we’ve invested significantly in product innovation, presentation and in-store effort to improve that business.

A Closer Look: Coach Earnings Cheat Sheet>>