There Are Still Plenty of Reasons to Worry About Coach Inc

A comparatively better performance this past quarter has many hoping Coach is on the road to recovery, but things were so bad a year ago, the handbag maker couldn't help but look better this year.

It's a welcome change in direction for handbag maker Coach , which posted its first positive quarter of sales growth in over two years, but don't get too excited. The leather goods company remains dysfunctional and still has lots of work to do before it can prove its turnaround is taking hold. A single quarter does not make a trend.

Coach said its fiscal 2016 second quarter net sales rose 4% to $1.27 billion, though net income fell to $188 million, or $0.68 per share, from the $200 million it logged last year. On a constant currency basis, sales were 7% higher for the period, but that was that offset by comparable store sales, which continued to fall, albeit at the lowest rate in two years.

A horrible, no-good year

If all of that sounds like Coach is moving in the right direction, it's because of just how horrible its performance had been previously. In the year-ago quarter, sales had fallen 12% on a constant currency basis, while profits plunged 37%. Comps in North America had fallen through the floor, declining 20% from the prior year.

But around that time, Coach also bought luxury shoemaker Stuart Weitzman for $574 million in a bid to further reimagine itself as an upscale lifestyle brand. Although adding women's shoes seemed to be of dubious benefit since it was hardly an underserved market and did nothing to help the company's ailing handbag business, it did serve to further accentuate the difference between Coach and rivals like Michael Kors , Kate Spade , and Tory Burch.

Michael Kors, which had quickly become the market darling just as Coach started to decline, was at least partially responsible for the latter's underperformance. The company has since run into many of the same problems Coach encountered. In fact, before the recent bullish trading, Coach shares had shed 16% over the past year, while Michael Kors stock was down almost 50%. Kate Spade has been in the same boat.

Growth is a luxury to be earned

Still, despite Coach's improving situation, serious concerns remain:

  • Virtually all of the gains it made this quarter were due to Stuart Weitzman, while the handbag business remains weak.
  • Although comps in North America were down just 4% this quarter, business was so horrible last year that it's more surprising it wasn't able to record any gains this period.
  • The handbag market didn't grow at all, and Coach was only able to move more units this quarter because it was so promotional.
  • Global comparable sales were also spotty, with higher mainland same-store sales offset by lower sales in Hong Kong and Macau, though Europe was up by double-digit rates.

CEO Victor Luis says that despite the lack of growth in its main sales region, he's confident in his previous prediction that Coach will start to see mid-single digit sales gains later this fiscal year.

Shoes kicked it higher

Still, Coach's investment in its new, more upscale image has hurt profits, and the only thing it has to show for these efforts is a fancy shoe line. That may be providing some support for the handbag maker, but complaints that the acquisition would only replace lost sales and do nothing to grow the primary business remain valid.

Coach needs to put together more than just one quarter of upbeat results to prove it has truly changed direction. Considering the weakness in 2015, a marginally better performance this time shouldn't dispel doubts. It still needs to be promotional to attract customers, which was one of its undoings before. Investors would be better off taking a wait-and-see approach instead of thinking Coach has turned the corner.

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The article There Are Still Plenty of Reasons to Worry About Coach Inc originally appeared on

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Coach. The Motley Fool owns shares of Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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