There's nothing luxurious about the latest performance of Coach's (NYSE: COH ) stock.
Shares are badly trailing the S&P 500, and have completely missed the market rally this year.
What will it take for Coach to get back in investors' good graces? If the latest results are any indication, that moment is still a ways off.
For one thing, Coach's comparable sales growth was weak last quarter. Coach turned in comps of just 1% in North America, its most important market. Yes, that's a big improvement from the 2.2% drop that it managed over the holiday quarter. But even these small figures aren't as big as they seem.
Coach lumps Internet sales in with its comparable sales figures. And without that benefit, sales growth would have been even worse over the holidays, and just about flat last quarter.
Worse still, the company can't count on a bigger retail sales footprint to take up the slack in comparable sales growth. Rather than boosting its locations, Coach has been hacking away at its retail store base. That count is down to 352 stores after the retailer closed five just last quarter.
Coach's factory locations, on the other hand, are on the rise. These stores, which cater to value shoppers with 20% to 70% discounts to retail prices, now make up a much larger portion of Coach's store base. Coach has added 22 factory locations over the last three quarters. And that shift toward factory outlets could help explain why Coach's operating income crept up by just 3.3% last quarter despite a 7% increase in sales.
Meanwhile, rival Michael Kors (NYSE: KORS ) is looking downright luxurious by comparison. The company saw a 37% bounce in comparable sales last quarter after opening 67 new retail stores. It even managed to double sales in Europe, a market that Coach hasn't yet been able to crack.
Michael Kors expects to keep up that growth, much of which is coming at Coach's expense. Kors' outlook calls for 20% sales growth next quarter.
A bright spot
Still, one area in which Coach handily beat its growing rival is gross profit. That figure was 74% for Coach last quarter, as compared to Kors' 63%.
That impressive profit level is a reminder of the strength of Coach's premium brand, its biggest asset as it pursues its turnaround plans. The company says it has the right executive team in place for that now, but is still in "the early stages" of its transformation into a lifestyle brand.
The good news is that investing in Coach right now has limited downside while shares are valued at just 16 times the $3.70 it earned over the last year. The bad news is that investors will need to be patient as Coach's turnaround continues to plug along.
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