Coach's Outlet Stores Offset Sluggish Department Store Business.

Leather goods maker Coach Inc (COH.N) reported better-than-expected quarterly sales and earnings on strong demand for its less expensive Poppy handbag line and rapid growth in China, sending its shares higher.

Chief Executive Lew Frankfort said in an interview that a strategy to entice shoppers with an extensive line of entry-priced products and to expand its outlets had paid off and driven sales in North America, which makes up the bulk of the business.

While China now accounts for only about 3 percent of Coach's sales, Frankfort said that by mid-decade, that could rise to 10 percent, or about $500 million.

Net income for the fourth quarter, which ended July 3, rose 34.1 percent to $195.5 million, or 64 cents per share, from $145.8 million, or 45 cents per share, a year earlier. The earnings beat Wall Street forecasts of 56 cents per share, according to Thomson Reuters I/B/E/S.

Coach said sales rose 22.2 percent to $950.5 million in its fourth quarter, while analysts had forecast sales of $888.87 million. The period included an extra week, without which Coach said sales would have been up 13 percent.

Sales at North American stores open at least a year rose 6.3 percent during the quarter.

Frankfort said in a statement that he was confident Coach's sales and profits could continue to rise at a double-digit pace, aided by global expansion in places such as China and Western Europe, where Coach is just entering the market.

For the fiscal year that just ended, retail sales in China doubled. Coach has 41 stores in China as of July 3, and has plans to open another 30 locations there this fiscal year.

Coach reported shipments in its wholesale business to U.S. department stores were flat during the quarter compared with a year earlier. But Frankfort said it was better to risk losing sales than start the discounting many department stores were engaging in.

"We have been reluctant to be promotional," he said.

Coach's efforts to expand its outlets have boosted sales and profits in North America, and more than made up for any stagnation in department store sales, he said.

Coach's gross margins rose 2.9 percentage points to 73.3 percent, in part because of a drop in leather prices. Frankfort said he expects the costs of raw materials to edge upward.

Coach operates 342 retail stores and 121 factory outlets in North America.

SOURCE: REUTERS By Phil Wahba Tue Aug 3, 2010