Morgan Stanley: Coach International Sales To Get Hurt By Currency Exchange

Coach Inc's COH second-quarter results will show continued weak domestic sales for its second period, while slower international sales may "add insult to injury," an analyst said Monday.

Morgan Stanley's Kimberly Greenberger trimmed her second-quarter earnings forecast by 9 percent to $0.66 a share for the luxury handbag maker, calling it a "fading brand story."

Coach, slated to post results before the bell Tuesday, closed down 1.4 percent at $37.09.

Analysts on average expect $0.66 a share on revenue of $1.23 billion.

Greenberger, who maintained an Underweight rating and $28 target, said the company ran retail sales promotions earlier and more often than expected in the second quarter.

This suggests two possible outcomes: meeting sales projections at the expense of margins, or missing both sales and margin expectations, Greenberger said.

Coach has forecast that sales will fall by a percentage in the "low double digits" while same-store sales will decline by a slightly higher amount.

"That may be optimistic," Greenberger said.

Noting Tiffany & Co.'s TIF recent disappointment regarding holiday sales, Greenberger said a strong dollar may exert a similar influence on Coach's international sales.

Coach's international sales amounted to $381 million of its $1.04 billion in first-quarter sales, according to its most recent 10Q filing.

In addition, the stronger dollar "certainly won't help Coach's U.S. retail locations, which may partly rely on Asian tourists," Greenberger said.

Coach earlier this month agreed to acquire Stuart Weitzman footwear brand for $530 million, plus up to $44 million in contingent payments to the private equity firm Sycamore Partners.

Greenberger expects the deal will be financed, leaving Coach with "less financial flexibility for later."

The company has said it will spend $570 million through 2017 to improve stores and wholesale locations, plus $50 million to boost advertising while shutting under-performing outlets.

Brand "repositioning" for Coach will require up to five years and its current valuation "looks undeservedly high," Greenberger said.

Of the 35 analysts following Coach, 22 maintain Hold ratings with five at Sell or Underweight; six maintain Buy or Overweight ratings, according to FactSet Research.