Shares of Coach Inc. plunged Wednesday after the upscale handbag seller said a challenging economy and heavy price-cutting by competitors weighed on its fiscal second-quarter results.
The muted holiday results offer more evidence that the shopping season was tough as shoppers grappled with the economic uncertainty brought on by the European recession and the U.S. "fiscal cliff" negotiations.
Coach is considered a bellwether for upper-middle-income shoppers who trade up to luxury goods, so the latest snapshot raises concern about their spending, as well as that of the wealthy.
The quarter is also evidence of growing competition from rivals like Michael Kors Holdings Inc., whose trendy bags are attracting loyal followers. Last year, Coach launched its Legacy collection of handbags inspired by classic styles in the company's archives. The company told investors during a conference call Wednesday that it's making its stores more inviting by such strategies as opening shoe salons in its freestanding locations to showcase its footwear.
The New York-based company says its net income was $352.7 million, or $1.23 per share, in the quarter ended Dec. 29. That compares with $347.5 million, or $1.18 per share, a year ago.
Net sales rose 4 percent to $1.50 billion.
The results were short of expectations for earnings of $1.28 per share on revenue of $1.6 billion.
Shares of Coach fell 16.4 percent, or $9.93, to close at $50.75 Wednesday. That's near their 52-week low of $48.24.
"During the holiday quarter, we drove modest growth and continued to gain overall traction on our key strategies," Chairman and CEO Lew Frankfort said in a statement. He noted that while the company posted strong international results, helped by a strong men's business, the company was disappointed by its performance in North America, where the holiday season proved "challenging."
"Most broadly, the consumer was impacted by a muted macroeconomic environment, while in the women's handbag category competition intensified and promotional activity increased," he added. He noted that despite a heavy promotional environment, Coach didn't succumb to the pressure and stuck with its pricing strategy to protect the brand.
Total North America sales rose 1 percent to $1.08 billion from $1.07 billion in the year-ago period. North American direct sales rose 2 percent for the quarter. Revenue at stores opened at least a year fell 2 percent. The measure is considered a key indicator of a retailer's health.
International sales rose 12 percent to $411 million from $368 million a year ago. Results in China remained strong, with total sales rising 40 percent and revenue at stores opened at least a year rising at a double-digit rate. In Japan, sales declined 2 percent on a constant currency basis.
Frankfort said China was on course to generate at least $400 million in sales this year. He also said that the company's men's business is on track to generate sales of more than $600 million globally for the current year, up 50 percent from a year ago.
But analysts say Coach needs to better respond to rivals.
"(Coach's) share losses in the U.S. are accelerating, which we expect to continue while large competitors continue the rapid square footage" expansion, wrote Michael Binetti, a UBS retail analyst in a note published Wednesday.
Brian Sozzi, chief equities analyst at NBG Productions, noted that during his trips to the malls during the holiday shopping season he noticed that Michael Kors stores were packed while Coach stores were not.
"Coach's product looked straight up stale, and the soft traffic reflected that," he added.