America’s Worst Performing Stock: Coach

For the full 2014 fiscal year, Coach posted earnings per share (EPS) of $3.10, compared with $3.73 in the prior year. Full-year revenues were also down, at $4.81 billion compared with $5.08 billion a year ago. Analysts were forecasting EPS of $3.04 on revenues of $4.76 billion. Beating expectations, as always, can come down to managing those expectations and that’s what Coach was able to achieve.

The company has been working on a brand transformation that it says will define “modern luxury.” To accomplish that, the company plans to close about 70 stores and expand its product line beyond high margin handbags to include lower margin apparel and shoes. The expanded product line contributed to a 3.1% drop in North American gross margins and a 1.8% drop in international gross margins in the fourth quarter. Here’s how Coach explained the decline in North American gross margins:

The decrease in gross margin is due to a 210 basis point decline as a result of increased promotional activity, primarily in our outlet channel, and a 70 basis point decline as a result of selling products with a higher average unit cost as well as increased penetration of our broadened lifestyle categories.

The drop in international gross margins was largely due to currency exchange issues, but Coach also identified the same headwinds internationally that it faced in North America.

Until the company proves that its new brand transformation can boost revenues and profits, all we have to go on is recent performance. And that has been, at best, mixed.

Coach stock traded down about 0.7% in the early afternoon Tuesday, at $36.58 in a 52-week range of $33.39 to $57.95.

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