Is Coach Still a Good Buy?

With competition in the luxury market space heating up, customers have more options than ever. Coach (NYSE: COH  ) might be manufacturing great luxury items, but customers no longer seem enamored by its products. Let's examine if its stock is still a "must-have" item for investors compared to other luxury-item retailers like Michael Kors Holdings (NYSE: KORS  ) or Fifth & Pacific's  (NYSE: KATE  ) Kate Spade.

Coach is falling behind
Coach did not have a great start to fiscal 2014 three months back. Coach warned in November that its customers planned to spend 4% less during the holiday season in 2013, and this was a signal that Coach investors should have heeded. When it came to buying handbags, women showed preference to Kors more than Coach versus the same period in fiscal 2013, according to a report by Cowen analyst Faye Landes.

As per the Cowen Consumer Tracking Survey, 39% of women between the ages of 18 and 34 preferred Coach over Michael Kors for handbags in December, down from 42% in November and 46% in December 2012. Likewise, for women who purchased three or more handbags a year, preference for Coach was 41% in December, down from 50% in December 2012. All of this data indicates that consumers' preference for Coach in the two key consumer groups was on the decline in the all-important North American market.

As a result, North American same-store sales, or comps, declined 13.6% versus the year-ago quarter, almost twice analysts' expectations. On the back of declining comps, revenue declined 6% to $1.4 billion from $1.5 billion a year ago. In constant-currency terms, consolidated revenue declined 3%. Fourth-quarter earnings per share fell to $1.06, down from $1.23 per share in the year-ago period. 

Silver linings
However, it's not all doom and gloom for Coach investors. International sales, which are about 30% of revenue, increased 2%, or 11% on a constant-currency basis, to $425 million from $418 million last year. China was the strongest growth driver, with gains of 25% on the back of double-digit comps growth. Also, sales at directly-operated locations in Asia, Japan, and Europe rose sharply as well. The men's business -- a strategic area of growth for Coach -- also continues to grow, with men's bags and accessories registering nearly 20% growth globally.

Going forward, Coach aims to move beyond handbags into a broader lifestyle brand that includes clothes and accessories. The company is also planning a comprehensive effort on women's assortments across bags, accessories, and lifestyle categories, as this turned out to be the weakest link. These initiatives are still in the early stages, and it will take a few quarters to see how this pans out. In addition, it is doing pretty well in China, which accounts for one-third of global luxury sales; this can be a good growth driver going forward.

Kors and Fifth & Pacific are in better positions
However, according to new research from Departures magazine and Ledbury Research, North America is the most important market for growth over the next five years. East Asia ranked second, followed by Western Europe, Eastern Europe, and then Central and South America. This research is supported by wealth statistics; according to Credit Suisse, the U.S. created 94% of the new millionaires in the world over the past year.

Whereas Coach's North American comps have been on the decline, Kors comps gained 21% year over year in the same region in the second quarter. It registered comps growth in all geographies across all segments. For example, retail net sales grew 47% over the prior period, and global comparable-store sales increased 23%, representing the 30th quarter of consecutive comp- store growth.

Fifth & Pacific's handbag brand, Kate Spade, is also doing well. It registered a 27% increase in its direct-to-consumer (e-commerce) sales, while overall sales for the brand jumped 65%  in the company's second quarter. The company launched a new handbag line in its specialty stores in the third quarter, and that business is off to a strong start, as per management. This new line is also doing well in the wholesale channel. However, with two (Lucky and Juicy) of the four brands -- Juicy Couture, Lucky Brand, Kate Spade, and Adelington Design Group -- already sold off, the valuation looks too expensive to be enticing.

Takeaway
Coach has lost almost 40% from its peak in 2012 and is trading at levels first seen in 2010. It trades at 13 times earnings currently. At these levels, with a yield as good as 2.6%, it seems like a low-risk-bet with significant upside if its plans work well and the company bounces back. However, competition from the likes of Kors is a big negative that investors should watch. 

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  • Report this Comment On February 10, 2014, at 8:51 PM, Lewishrc21 wrote:

    Have you considered COH has no debt? No debt, historically low valuations. Why doesn't the company just issue some cheap debt and buy back boat loads of shares? Makes a lot of since.

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