Despite a tough retail environment, volatility in tourist spending and macroeconomic headwinds, Coach, Inc. (COH - Free Report) posted better-than-expected second-quarter fiscal 2017 bottom-line results. The adjusted earnings of 75 cents a share beat the Zacks Consensus Estimate by a couple of cents, thereby resulting in a positive earnings surprise of 2.7% and marking the 12th-straight quarter of earnings beat. The quarterly earnings also increased roughly 11% year over year.

Net sales of this New York-based company came in at $1,321.7 million, up about 4% year over year, and include a favorable impact of 40 basis points from currency translation. However, sales growth were hurt by 100 basis points on account of management’s efforts to elevate the Coach brand’s positioning in the North American wholesale channel by lowering promotional events and door closures. We noted that the top line came almost in line with the Zacks Consensus Estimate of $1,322.2 million.

Coach registered third consecutive quarter of positive comparable-store sales at its North American segment. The company’s international operations witnessed healthy growth with strength seen across Europe and Mainland China.

FindTheCompany | Graphiq

The company is undergoing a brand transformation and is introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman has been accretive to its performance, and is being viewed as a significant step in its efforts toward becoming a multi-brand company. Management highlighted that net sales for the Coach brand aggregated $1.20 billion (up 2%), while that of Stuart Weitzman brand totaled $118 million (up 26%) for the quarter.

Coach’s shares were up 1% during pre-market trading hours. However, we noted that in the past six months, the stock has declined 17.2%, while the Zacks categorized Textile-Apparel Manufacturing industry, to which it belongs, has fallen 17.8%.

Behind the Headline

Total North American Coach brand sales rose 2% on both reported and constant currency basis to $744 million. Direct sales jumped 5%. Total North American bricks and mortar comparable store sales jumped about 4%, while aggregate North American comparable store sales grew approximately 3%, including the adverse impact of E-commerce. On both POS and net sales basis, North American department stores sales plunged approximately 30%.

International Coach brand sales increased 3% to $448 million from the year-ago quarter figure. On a constant currency basis, International sales rose approximately 1%. Sales in Greater China remained flat in dollar terms, but jumped 6% on a constant currency basis attributable to positive comparable store sales and sturdy performance in Mainland China. Further, Hong Kong and Macau showcased considerable improvement from earlier trends.

Sales in Japan advanced 9% in dollar terms, but fell 2% on a constant currency basis. Sales for the rest of the direct operations in Asia witnessed low-single digits decline on a reported and constant currency basis, while in Europe sales remained sturdy, marching at a double-digit rate.

Consolidated adjusted gross profit grew 6% to $906.4 million, whereas, gross profit margin expanded 120 basis points to 68.6%. Adjusted operating income came in at $294.3 million, up 3% from the prior-year quarter figure, while operating margin contracted 10 basis points to 22.3%. Management continues to expect operating margin in the band of 18.5%–19% for fiscal 2017.

Store Update

During the quarter, Coach opened three locations in North America, thereby taking the count to 434. In Japan, total number of locations remained at 191. In Greater China, the addition of five new locations and the closing of two stores during the quarter increased the total count to 191. Across Asia (Other), store count increased to 104 owing to the opening of one store. In Europe, the store count jumped to 40 following the opening of two stores and closing of one store. There were 82 Stuart Weitzman stores at the end of the quarter following the opening of six stores and closing of one location.

Other Financial Details

Coach ended the quarter with cash, cash equivalents and short-term investments of $1,835.9 million, long-term debt of $591.6 million and shareholders' equity of $2,811.1 million.

Guidance

Due to strengthening of the U.S. dollar, management now envisions low-single digits increase in the fiscal 2017 revenue, including an expected unfavorable impact of 50 basis points from foreign currency. Earlier, the company had projected low-to-mid single digits increase in revenue, including a favorable impact of 100-150 basis points from foreign currency.

The company continues to anticipate double-digit growth in both net income and earnings per share for the fiscal year. Interest expense is expected to be about $25 million for the fiscal year.

Zacks Rank

Currently, Coach carries a Zacks Rank #4 (Sell). Investors interested in the retail space may consider some better-ranked stocks such as Best Buy Co., Inc. (BBY - Free Report) , The Children's Place, Inc. (PLCE - Free Report) and Tailored Brands, Inc. (TLRD - Free Report) , all flaunting a Zacks Rank #1 (Strong Buy). 

Best Buy delivered an average positive earnings surprise of 25.7% in the trailing four quarters and has a long-term earnings growth rate of 11.9%.

The Children's Place delivered an average positive earnings surprise of 36.3% in the trailing four quarters and has a long-term earnings growth rate of 10.3%.

Tailored Brands delivered an average positive earnings surprise of 8.4% in the trailing four quarters and has a long-term earnings growth rate of 17.5%.