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Coach's Key Business Drivers

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Though we are a motley bunch, one common belief among Fools is that investors are better served by taking a long term perspective and focusing on a company's key drivers, not whether it managed to beat Wall Street's earnings estimates by a penny. In this series, we'll examine some key drivers that could help determine several popular stocks' future returns. To kick things off, we'll be taking a look at two transformational drivers for luxury-goods company Coach (NYSE: COH  ) . Its ability to execute on these two fronts should play a large role in determining whether investors will send this stock to new highs or to the discount bin.

Not just handbags anymore
If you've listened to Coach's management speak in the past year, you've probably heard them mention the company's first key driver: the move to reposition Coach as a lifestyle brand. In its most recent fiscal year, handbags accounted for 65% of the company's net sales. If successful, this move will diversify its customer base while increasing the total number of customers who will be interested in purchasing its products. Having previously made the leap from manufacturing unlined leather bags in only a few styles and colors to its current place as a preeminent fashion brand, transformation is nothing new to Coach.

One of the first fruits of Coach's labor has been the development of its men's line, which has seen revenues grow from $100 million to more than $600 million in the past few years, according to management. And it looks like it still has room to run, too; the men's line accounted for roughly only 8.5% of net sales in 2012, even though it had grown by more than 50% in 2012 and 2011.

As for when we can begin to see the first expressions of Coach's full-court push to become a lifestyle brand, CEO Lew Frankfort noted during the 2013 Consumer and Retail Conference that investors should pay close attention to what happens during the holiday quarter of this calendar year. Given the time, money, and effort that management has devoted to this pursuit, investors should keep a close eye on it.

If you're going to change the merchandise ...
Coach wants to change its identity – but for this transformation to be a success, it needs to have a solid plan to introduce the new Coach to its customers. And trying to display this new identity in stores designed solely to sell handbags makes little sense. This makes redesigning their stores the second key driver, because it will give Coach a better canvas to display its new lifestyle image, showcase more products, and drive additional sales.

One of the ways that the company is currently looking to free up space in its existing stores is by transitioning to mobile points of sale and removing cash wraps, the gargantuan counters that you visit when making a purchase. If you've ever been to an Apple store, then you know exactly what Coach is shooting for.

This additional space has initially been used to promote Coach's new shoe offerings -- a wise move, considering stores that showcased shoes during their relaunch saw shoe sales rise from about 3% of the store's business to 12% in only five weeks. Ultimately, this driver is really all about complementing the first and making the transition more successful.

While these two drivers alone will not determine whether Coach outperforms the market in the coming years, its odds of outperformance decreases dramatically unless it can execute on both of these fronts.

I hope you enjoyed this first look at a few of Coach's key drivers. Feel free to try this exercise on some of your favorite companies, and stay tuned. In the coming days, we'll be back with two more drivers that could affect Coach's future.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only the most forward-looking and capable companies will survive, and they'll handsomely reward investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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9/27/2016 4:02 PM
COH $35.65 Up +0.08 +0.22%
Coach CAPS Rating: ****