*Updated from 8:30 a.m. to include conference call comments. NEW YORK (TheStreet) --aThe better-than-expected earnings from handbag and accessories maker Coach may be a kind ofagrand illusion,aallowing investors to see eitheraof two different images. Some will seeathe positive first fiscal quarteraresults as proof of aabudding transformation of a storied brand in the mall. Others see only a company still in turmoil due to competition from Michael Kors , Kate Spade and Polo Ralph Lauren . A new, unfortunate wrinkle came todayain the form of waning sales growthain key Asian markets, such as Hong Kong. aa Must Read: Dunkin' Donuts CEO Is Pushing to Win the Battle for Breakfast a Coach reported net sales of $1.04 billion, beating the $1.01 billion Bloomberg consensus. Earnings per share also topped estimates, coming at 53 cents a share versus 46 cents a share. "Our first quarter results were in line with our expectations and our annual guidance," said Coach's CEO Victor Luis in explaining the performance. The message for investors is that the more-fashionable products ofanew creative directoraStuart Vevers that trickled into stores in September, the closure of underperforming retail stores and fewer outlet promotions have stopped the surprising plunges in Coach's sales and earnings that hasapressured the stock throughout 2014.a Coach noted on its earnings call that it had "even stronger,apositive" same-store sales growth for products priced above $400 compared to trends in the last 12 months as it flowed in more appealingamerchandise to remodeled department storeaand retail store locations. a Luis said, "We are seeing better performance at doors (department store shops and retail stores)awith a full and partial remodel."a Coach intends to remodel 150 of its mall-based retail stores in fiscal year 2015, accompanied by 140 refreshes of the presentations at department stores.a The visual upgrades at department stores boast digital walls that display Coach productsaand improved racks, as well as shop managers that help to guide a person through a purchase. The company ultimately stressed it's seeing a "new" customer to the Coach brand, one that is better in tune withathe latest trends in apparel and accessories. In other words, Coach would appear to be the next great retail turnaround story. Still, Wall Street remained unconvinced, sending Coach shares lower by 6.5% in midday trading. The reason for the Street's lack of confidence -- the underlying data. Coach's better-than-anticipated quarter, relative to Wall Street's subdued expectations,astill showed declining sales and plungingaprofit margins, underscoring the entrenchedacompetitive threats in the mall and within department stores like Macy's and Lord & Taylor. Coach's adjusted gross margin fell 258 basis points year-over-year to 69.25%, a large majority of the decline stemming from costs to improveaproduct quality andaa pull back on discounts at outlets that harmed traffic.a The resultafollowed a 360-basis-point drop year-over-year in the fourth fiscal quarter. North American comparable store sales declined 24.4%, a faster pace of decline than the 17% delivered in the fourth quarter. Coach blamed reduced discounting at its outlets asathe primaryareason for the weak comparable store sales, adding on the call thata"the overall outlet environment was definitely more promotional."a But store trafficaandaconversion at Coach's full-price retail storesawas once again lower, said the company on the earnings call.aWall Street expected a 25.5% fall in same-store sales. Coach remains on track to close 70 underperforming retail stores "shortly after" the holidays. Must Read: Timberland Owner VF Corp. is "Looking Hard" for Acquisitions, Says CFO a Further, same-store sales in Coach China were "positive" according to the company, a slight shift in language from prior quarters of "double-digit" percentage increases. Coach executives highlighted challenging foreign tourism activity, due toageopolitical volatility,ain the key markets ofaHong Kong andaMacau as "major issues." AlthoughaCoach's comments on Asia amounted to a thinly veiled financial warning, execs reiteratedathey continue to see $600 million in sales from the country this year.a Coach has about 153 locations in China, including 134 on the mainland, in 55 cities. Smaller rival Michael Kors now has roughly 112 retail locations in Greater China, Korea, Southeast Asia and Australia. On the earnings call, Coach reiterated that itaprojects full-year North American same-store sales to decline by a "mid to high 20s" percentage, gross profit margins in a range of 69% to 70%, and a "high-teens" percentage operating margin. Must Read: Papa John's Founder, CEO on the Pizza Wars: "Now We're Back to our Culture of Tinkering"
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