Is Coach Still a Good Buy?

Competition from peers is taking Coach down, but can the luxury-goods maker bounce back?

Feb 6, 2014 at 5:45PM

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. 

Three great stocks with even greater returns
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multi-billion dollar industry. Our analysts have done it before with the likes of Amazon and Netflix. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

 

Ayush Singh has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers