Two More Key Business Drivers for Coach

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Coach's (NYSE: COH  ) earnings are just around the corner, which makes right now the perfect time to discuss two more of Coach's key drivers. We may not get concrete numbers for these two factors on July 29, but Fools will certainly want to listen for any clues about them from management. These two aspects of Coach's business will likely play a significant role in determining whether the luxury handbag maker beats the market in the next few years.

Tech? I thought we were talking about a fashion
Our third driver is Coach's ability to integrate technology into its operations, both as a marketing and engagement tool and as a point of sale.

Currently, customers visit Coach's site primarily to pre-shop before heading to a store. However, this trend may be changing. Coach's electronic traffic and sales have been growing consistently in the double digits, and the percentage of total sales that come from mobile devices has been growing in the past few quarters. Thanks to the popularity of mobile computing, brands now have the opportunity to dramatically increase customer engagement. Gallup's research has found that there are multiple benefits to be had from increasing customer engagement, so Coach's management would be small-f foolish not to take advantage of this opportunity.  

Moreover, Coach's digital retail space is growing materially faster than its brick-and-mortar stores, even though it has just begun focusing on international e-commerce. If Coach applies what it learned from the U.S. e-commerce launch during its global rollout, the payoff could be huge.

International, international, international
"International" seems like every management team's favorite buzzword when discussing growth opportunities. But in Coach's case, it is unquestionably a key driver. With less than 34% of Coach's sales coming outside of North America, the company has ample room for years of robust international growth.

Some analysts have questioned why Coach is looking to expand its European presence when it has historically had little to none and the overall European economy is currently struggling. But I think this is a shrewd move by management. Europe is still one of the largest global premium markets, representing approximately 20% of the category's sales. This move will also enable the company to maintain contact with consumers from the crucial Asian market while they are on vacation.  

Speaking of which, the big international growth story is -- unsurprisingly -- China. Sales there grew by a robust 64% last year, and management currently sees opportunity in each of three different Chinese distribution channels.

The first, luxury shopping malls and freestanding locations, are important from a marketing and luxury-image standpoint. In this channel, Coach is on pace to open 30 new stores in China during this fiscal year, bringing its total count up to 125 and increasing total square footage by 35%.  

Lifestyle shopping malls and department stores are the second channel, and the primary way Coach aims to take market share in China. Many of Coach's full-price luxury items are priced slightly lower than its competitors' offerings, so they should still be accessible to most shoppers in these stores. On the other hand, Coach's rivals could potentially be priced out of this channel unless they are willing to discount their items. But doing so might risk tarnishing those companies' high-class image.

Although China's GDP has more than tripled since 2005, consumption is still only approximately 34% of China's GDP (ours is north of 70%). China's government has acknowledged that there needs to be a shift toward becoming more of a consumer-led economy, so it stands to reason that this channel has years' worth of growth ahead of it.

The last channel is factory malls, and if Japan is any indication, this market could become huge. The Japanese factory mall channel went from essentially being nonexistent in 1999 to generating more than $7.5 billion in sales last year. Historically, this channel really takes off once traditional luxury brands enter a market. We're now seeing that happen in China.

We Fools should try to identify factors that will affect a stock's returns for years to come. Selling a stock that moved 5% after earnings might score you a small, quick win, but holding out for a spiffy-pop can help you build a truly powerful long-term portfolio.  

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of the last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those 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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5/25/2016 11:10 AM
COH $39.52 Up +0.04 +0.10%
Coach CAPS Rating: ****