Can Coach Turn It Around?

Coach (NYSE: COH  ) recently announced second-quarter earnings results that disappointed investors and sent shares tumbling. The company has been battling popular competitors like Michael Kors Holdings (NYSE: KORS  ) in key product segments like women's handbags and accessories in the crucial North American market. Unfortunately, Coach has been losing the battle so far.

Earnings disappointment
Coach reported revenue of $1.4 billion for the quarter ended Dec. 28, which represents a 6% decline from last year's comparable quarter in which the company generated $1.5 billion and a 3% decline on a constant currency basis.The decline is especially significant because it took place during the busy 2013 holiday shopping season, during which overall sales increased 2.7% from the 2012 season despite severe weather conditions.

Unfortunately, Coach also disappointed on the earnings front in the second quarter. Diluted earnings per share came in at $1.06, which represents a decline of 14% from last year's comparable quarter, in which the company reported diluted earnings per share of $1.23.

Coach CEO Victor Luis explained, "During the holiday quarter, total sales fell slightly in constant currency as weakness in our North American women's bag and accessories business offset strong growth in men's, footwear, and robust results in emerging Asian markets and Europe."

Luis expounded, "We continued to be disappointed by our performance in North America, which was affected by substantially lower traffic in our stores and by our decision to limit access to our e-factory flash sales site."

Brand weakness
The weak results from Coach in the lucrative North American handbag and accessories segment speak volumes about the company's current problems. The Coach brand is simply not as popular as it once was in domestic markets. Newer brands like Michael Kors are more popular and have taken away business from traditional retailers like Coach.

The social media test indicates as much. On Facebook, the Coach official main page has approximately 4.9 million fans, which is less than half the 10.7 million fans that the Michael Kors official main page has. While this method is not foolproof, it does indicate that the Michael Kors brand is significantly more popular than Coach at the moment, especially among younger shoppers who gravitate toward social media.

Lagging growth
Not surprisingly, a weaker brand is translating into weaker growth for Coach. The following is a breakdown of Coach's projected growth for fiscal 2015 compared to that of Michael Kors: 

Company

Coach

Michael Kors

Revenue Growth 2014

6.4%

24.8%

EPS Growth 2014

10.7%

23%

*Coach's fiscal year ends in June, Michael Kors' fiscal year ends in March

With regard to both revenue and earnings, Michael Kors is expected to experience growth that is more than double that of Coach in fiscal 2015. What's more impressive is that Michael Kors is set to wrap up a terrific fiscal 2014 in which the company is expected to have grown sales and EPS approximately 40%. Coach, on the other hand, is expected to end 2014 with largely flat revenue growth and a 7% decline in EPS.

However, Coach does have a few things going for it. The company's shares are trading at cheap valuation levels, with a trailing 12-month P/E of 14.5 and an even cheaper future 12-month P/E of 13.7. These ratios are significantly lower than Michael Kors' respective P/E ratios of 31.4 and 22.2. Also, Coach does pay a dividend of $1.35, which equates to a rather substantial yield of 2.6%. Michael Kors does not pay any dividends at this time. 

Is a turnaround possible?
As negative as things may seem for Coach currently, several positives did come out of the company's recent earnings results. Management stated that the company is performing well in its men's and footwear product segments. The company is also making significant progress with its Asian and European operations.

However, these aspects are not yet strong enough to overcome the serious brand weakness Coach is experiencing in its valuable North American market. As such, Coach remains nothing more than a value play while Michael Kors remains the best growth opportunity in high-end retail.

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