Is the Coach Turnaround Real?

With rapidly decelerating growth, Coach has fallen victim to waning brand power and increasing competition, but it nonetheless remains an interesting turnaround candidate.

Mar 17, 2014 at 12:45PM

In recent years, traditional high-end retailer Coach (NYSE:COH) has been hurt by increasing competition from newer and more popular fashion companies like Michael Kors (NYSE:KORS). With declining market share in valuable product segments like handbags and accessories and rapidly decelerating top- and bottom-line growth, Coach has struggled mightily.

With the company's stock down over 12% in 2014 alone, many investors have seemingly left Coach for dead. However, management at Coach has recently initiated a turnaround plan that, if viable, could return value and growth to shareholders.

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Signature MK logo. Source: Company Facebook 

The problems
The main problem for Coach is quite simply Michael Kors. As Coach has been steadily losing valuable market share, Michael Kors has been gaining it. For instance, from 2011-2012 Coach's portion of the handbag market fell from 19% to 17.5%. In the same two-year time period, Michael Kors increased its portion of the handbag market from 4.5% to 7%. 

The story remains the same with regard to overall growth as well. In its most recently reported quarter, which ended on Dec. 28, Coach's total revenue declined approximately 6% on a year-over-year basis. Even worse, the company's earnings per diluted share declined approximately 14% in the quarter. 

Meanwhile, Michael Kors delivered nothing short of staggering growth in its most recently reported quarter. The company grew total revenue 59% on a year-over-year basis in the quarter which ended on Dec. 28. However, the company reported an even more impressive earnings per diluted share performance as this figure grew 73% in the quarter. 

The reason behind the terrible results for Coach and the great results for Michael Kors comes down to brand popularity. Quite simply, consumers currently view Coach as a stale brand, while they view Michael Kors as a brand in extremely high demand.

The social media test I typically like to perform on retailers confirms as much. For instance, on Facebook, Coach has only 5 million fans while Michael Kors has 12.4 million. Twitter shows largely the same results, as Coach has 536,000 followers versus Michael Kors' 1.8 million.

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Source: Company Facebook 

The turnaround?
Although Coach currently faces a very serious brand image problem, I have to give credit to management for trying inventive ways to turn the company around. Instead of simply trying to shape a new image for itself in the minds of target consumers, which management is trying to do via the addition of new high-priced products, the company has also focused on entirely new areas of growth.

The new areas of growth primarily include men's product lines and the international segment, which makes up approximately one-third of Coach's total revenue.

The Men's product line stood out for Coach, even in the company's struggling North American markets. Particular strengths in the quarter were Coach's accessories lines and bag lines for men. By continuing to open new stores that cater specifically to men and by allocating more space in existing stores to men's product lines, Coach appears set to continue capitalizing on this new-found trend.

Chief executive officer Victor Luis explained, "Looking ahead, we remain bullish about the prospects for our men's global business, where we're continuing to target about $700 million in sales in FY14, up about 20% from last year, and $1 billion in sales in three years." 

Meanwhile, the company's international sales increased 2% in the most recent quarter, which came in stark contrast to the company's 9% sales decline in North America. The standout area of growth was China, where revenue grew an impressive 25%. 

In the quarter, management opened 10 net new locations in China, which now has a total store count of 142. More importantly, same-store sales grew in the double-digits in the region, which indicates that demand remains strong for the Coach brand in the huge China market. 

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Bottom line
Coach has struggled in recent years with increasing competition from peers like Michael Kors and waning brand power. However, management has started to shift the focus of the company to areas of strength, which should help offset some of the company's growth challenges in its signature markets.

If growth does return to Coach's large North American market, the company as a whole should emerge as a much more diverse entity. Accordingly, investors willing to wait it out may find a viable turnaround story at work in Coach.

Is Michael Kors an ultimate growth stock?
While Coach struggles, Michael Kors continues to skyrocket. Is the company an ultimate growth stock? They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Philip Saglimbeni has no position in any stocks mentioned. The Motley Fool recommends Coach, Facebook, Michael Kors Holdings, and Twitter. The Motley Fool owns shares of Coach, Facebook, and Michael Kors Holdings. 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.

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