Why Shares of Coach May Continue to Underperform

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Investors punished shares of Coach (NYSE: COH  ) on Tuesday, pushing the stock down nearly 10% to trade around $52 a pop. Much of the attention on the stock yesterday was focused on the fact that two key executives said they would step down. Coach's North American president, Mike Tucci, along with its chief operating officer, Jerry Stritzke, announced they would be leaving the company next month. While this news is unfortunate, it's distracting investors from the real issues plaguing shares of Coach.

Management shakeup
These departures aren't likely to have a material impact on Coach. In fact, most analysts had predicted that these executives would leave the company after neither were chosen to succeed Lew Frankfort as Coach's CEO. Victor Luis, rather, will take over as chief executive when Frankfort moves on in January.

However, Coach shareholders should be more concerned with Reed Krakoff's impending exit next June. Krakoff transformed Coach from a hawker of leather goods into a global luxury brand during his 16-year tenure as the company's president and executive creative director. Nevertheless, come next June, Stuart Vevers from leather goods company Loewe will replace Krakoff as Coach's creative director.

The problem with this executive shuffle is that it comes at a transitional time for the company. Coach is attempting to rebrand itself as a lifestyle brand, to better compete with rival Michael Kors (NYSE: KORS  ) . However, broadening the company's products to include more clothes, jewelry, and shoes may prove more challenging while simultaneously transitioning a new creative head. Meanwhile, competitors such as Kors continue to steal market share from Coach.

Shares of Kors are up more than 61% in the past year, whereas Coach stock has gained just 3% over the same period. Investors want high-growth businesses with globally relevant brands, and that's not something Coach is delivering these days.

Where's the growth?
Coach's fourth-quarter earnings were a disappointment for the most part, as the retailer struggled with slowing domestic handbag sales and declining comps. Same-store sales in the U.S. dropped 1.7% in the quarter, while revenue rose just 5.8% to $1.22 billion. For comparison, rival Kors achieved revenue growth of 57% in its last quarter with same-store sales increasing 36% in the period. The namesake stock is set to report its first-quarter fiscal 2014 earnings on Aug. 8.

As for Coach, don't count on a rebound in the stock anytime soon. Rebuilding the brand isn't something that will happen overnight, and I suspect investors will wait on the sidelines until the company has proven itself as a so-called lifestyle brand. Coach is expected to release its first clothing line in October. How well this upcoming clothing launch goes will be a strong indicator for investors about the future of Coach as a luxury lifestyle brand.

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DocumentId: 2570528, ~/Articles/ArticleHandler.aspx, 9/26/2016 11:53:14 AM

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