Handbag marketer Coach Inc. (COH) offered some encouraging indications about consumer spending on Tuesday, saying demand for its leather goods and accessories is no longer dropping and reporting fiscal third-quarter earnings and sales that topped analysts' expectations.

"We feel we've turned the corner," Coach Chief Executive Lew Frankfort said in an interview with Dow Jones Newswires. "We're very confident about the future."

That confidence prompted Coach to institute a 30 cents a share annual dividend, only the second member of the Standard & Poor's 500 Index, aside from Oracle Corp. (ORCL), to do so this year. Forty-four of the companies have decreased their payout and six have suspended it since 2009 began.

While it may be too early to declare conditions are getting better for retailers overall, Frankfort's comments come a couple of weeks before other retailers begin issuing their own quarterly results, and they're serving as a welcome precursor. Investors are responding to the earnings news and the new dividend by lifting Coach stock 14% to $20.75, its highest level since the beginning of the year.

Coach's third-quarter sales "were essentially even" with the same period last year, and comparable store sales for the quarter returned to pre-Christmas levels in North America, Frankfort said.

The stable trend is continuing in April, after adjusting for Easter's shift to this month from March, Frankfort said.

Coach "is seeing improved traffic and that is key," said Robert Drbul, retail analyst at Barclays Capital. "But one must still remain pretty cautions because of the volatility in the economy."

To build momentum, Coach plans to increase to 50% the amount of bags it sells between $200 and $300. The move expands an effort the company slowly began in 2008, and that currently stands at about 30% of handbags.

At the same time, Coach will cut back a bit on the amount of higher-priced bags and accessories it sells, although flagship stores will still carry a large amount of higher priced items.

Coach is acting after net income for the fiscal third quarter that ended March 28 dropped to $114.9 million, or 36 cents a share, from $162.4 million, or 46 cents, a year earlier.

Excluding costs for job cuts, closing stores and other restructuring measures, Coach would have earned 38 cents a share. The figure compares to 37 cents by analysts that FactSet polled.

Sales for the quarter declined by less than 1%, to $739.9 million from $744.5 million. Wall Street had projected $711.5 in revenue.

Gross margin narrowed to a still-healthy 71% from 75% a year earlier, but was affected by greater promotions at its outlets and the introduction of lower-costing merchandise in Coach's full-priced stores.

Inventories rose 23% to $358 million, in part to support new stores in the U.S. and overseas, and down from 39% at the end of the second quarter. The company's goal is to have inventory up by just 10% at the end of this fiscal year.

To reduce some expenses, Coach is closing a few stores in tony areas including Greenwich, Conn., and Palm Beach, Fla., saying rents are high there and customer traffic is on the lower side.

The goal is to find the "sweet spot, with Coach products still carrying cache, but not priced beyond the reach of customers effected by the poor economy. "We want to be accessible to the consumer [who] has been impacted by the recession and also be appealing to those who have money and might be reluctant to spend," Frankfort said.

Coach sees immense opportunity in Asia, especially China, where it already operates 27 stores. Another 10 are planned for next year as part of plans for 50 within the next five years. Coach's stores in China are experiencing double-digit comparable-store sales growth, Frankfort said. "China is emerging and there is an open playing field for Coach to develop its business where there are no other indigenous brands."

While its own North American stores and outlets continue to grow, the company is doing less through one of its traditional avenues, department stores, where sales fell 30% over the quarter as locations closed and Coach opted out of participating in the deep discounting many of the stores conducted.

Coach will open 20 full-priced stores in North America in the coming year, about half the amount it has over the prior two year.

-By Karen Talley; Dow Jones Newswires; karen.talley@dowjones.com; 201-938-5106