Despite tough retail landscape and volatility in macroeconomic environment, Coach, Inc. (COH - Free Report) posted better-than-expected fourth-quarter fiscal 2017 bottom-line results. The adjusted earnings of 50 cents a share beat the Zacks Consensus Estimate by a penny, thereby resulting in a positive earnings surprise of 2% and marking the 14th straight quarter of earnings beat. The quarterly earnings also increased roughly 11.1% year over year. Lower SG&A expenses and improved operating margin provided cushion to the bottom line.

Net sales of this New York-based company came in at $1,133.8 million, down about 1.8% year over year. However, excluding the extra week in fiscal 2016, net sales rose 6% on a reported basis, while 7% on a constant currency basis. Sales growth were hurt by 60 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.

Coach registered positive comparable store sales at its North American segment. The company witnessed healthy growth across directly-operated Europe and Mainland China operations. The company is undergoing a brand transformation and is introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman and Kate Spade & Company 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 $1.05 billion, while that of Stuart Weitzman brand totaled $88 million for the quarter. However, we noted that the total sales fell short of the Zacks Consensus Estimate of $1,146 million for the fourth successive quarter.

Coach’s shares are down about 9% during pre-market trading hours. Nevertheless, in the last six months, the stock has gained 26.2% compared with the industry's growth of 17.6%.

Behind the Headline 

Total North American Coach brand sales came in at $586 million down from $606 million reported in the last year. Excluding the additional week in fiscal 2016, total brand sales jumped 4%, while direct sales rose 5% on a dollar basis and 6% on a constant currency basis. Both North American aggregate and bricks and mortar comparable store sales increased about 4%.

International Coach brand sales came in at $442 million marginally down from $450 million posted in the year-ago period. Excluding the additional week, total sales rose 6% in dollar terms, while 9% on a constant currency basis. Sales in Greater China grew 3% in dollars and 7% in constant currency attributable to double-digit increase and comparable store sales growth in the Mainland, partly offset by continued sluggishness witnessed across Hong Kong and Macau.

Sales in Japan fell 3% in dollar terms and 1% on a constant currency basis. Sales for the rest of the direct operations in Asia witnessed mid-single digits decline in dollars as well as constant currency basis on account of macroeconomic and geopolitical headwinds in Korea. Sales in the directly operated channels in Europe remained sturdy, marching at a double-digit rate.

Consolidated adjusted gross profit declined 3.3% to $756.8 million, whereas gross margin contracted 100 basis points to 66.8%. Adjusted operating income came in at $179.5 million, up 2.7% from the prior-year quarter figure, while operating margin expanded 70 basis points to 15.8%.

Store Update

During the quarter, Coach opened 1 location and closed 6 locations in North America, thereby taking the count to 419. In Japan, total number of locations remain unchanged at 184. In Greater China, the addition of 4 new locations and the closing of 2 increased the total count to 199. Across Asia (Other), store count increased to 105 owing to the opening of 3 stores and closing of 1 store. In Europe, the store count jumped to 55 following the opening of 9 stores and closing of 1. There were 81 Stuart Weitzman stores at the end of the quarter.

Other Financial Details

Coach, which carries a Zacks Rank #3 (Hold), ended the quarter with cash, cash equivalents and short-term investments of $3,083.6 million, long-term debt of $1,579.5 million and shareholders' equity of $3,001.9 million.

Guidance

Management now expects fiscal 2018 revenue to increase approximately 30% year over year to $5.8–$5.9 billion, with low-single digit organic growth and Kate Spade acquisition adding more than $1.2 billion in revenue. The company envisions earnings in the range of $2.35-$2.40 per share, reflecting an increase of approximately 10–12%, comprising low-to-mid-single digit accretion from the Kate Spade buyout.

Coach projects operating income growth in the band of 22–25% on the back of mid-single digit organic growth, Kate Spade buyout and estimated synergies of $30-$35 million. Interest expense is expected to be about $90 million for the fiscal year.

Interested in the Retail Space? Check Out These

Investors interested in the retail space may consider some better-ranked stocks such as The Gap, Inc. (GPS - Free Report) , The Children's Place, Inc. (PLCE - Free Report) and Gildan Activewear Inc. (GIL - Free Report) . These stocks carry a Zacks Rank #2 (Buy).

Gap delivered an average positive earnings surprise of 6.5% in the trailing four quarters and has a long-term earnings growth rate of 8%.

The Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters and has a long-term earnings growth rate of 9%.

Gildan Activewear delivered an average positive earnings surprise of 5.5% in the trailing four quarters and has a long-term earnings growth rate of 13.5%.