Investors have pushed shares of Coach (TPR 1.50%) lower since the start of 2014, as rival luxury retailer Michael Kors (CPRI -3.04%) has continued to steal market share from Coach in the apparel and accessories industry. However, the stock looks like a good value for long-term investors today, with shares of Coach now trading more than 17% below the stock's 52-week high at around $49 apiece. On top of this, the following catalysts should bode well for Coach stock going forward.
Source: Coach.
A value play at today's price
Coach trades at a discount to rivals in the space. Shares look reasonably priced today compared to industry rivals such as Michael Kors. Coach, for example, has a price-to-earnings ratio of 14.55, which is well below the industry average of 19.17. Kors stock, on the other hand, looks expensive with a P/E ratio north of 31. Nevertheless, Coach's stock has fallen 37% during the past two years, whereas the S&P 500 gained 35% and shares of Michael Kors climbed 110% in the same period.
Profit declines and deflated same-store sales in recent quarters were to blame for Coach's fall from grace. Since 2011, Coach has generated an average growth rate of just 9%, whereas Kors has grown its North American sales by more than 50% nearly every quarter over the same period. Looking ahead, however, Coach should be able to capture new growth in emerging markets such as Asia.
Overseas growth
International business currently accounts for just 31% of the retailer's total sales, which creates a clear runway for growth going forward. China looks particularly promising. Coach's Chinese sales grew by as much as 25% in the company's fiscal 2014 second quarter. Better still, its China business is on track to generate around $530 million in sales this year.
Management should also be able to achieve higher operating margins in China going forward as it continues to drive down costs and grow its presence in the region. In addition to the Asian market, Coach is also expanding its operations in Europe, where it currently operates 24 stores. Moreover, the luxury retailer hopes to grow its customer base by adding new product lines to its merchandise mix.
A fresh product mix
Coach is rebranding itself as a so-called lifestyle brand by focusing more heavily on product categories such as shoes and apparel -- a strategy that has worked well for Kors. This new product mix should help Coach boost its revenue in the quarters to come. On top of this, the company continues to successfully grow its men's business. Sales from its men's segment currently make up just 10% of the business. However, this category is growing at a breakneck pace, with men's sales up 50% last year to $600 million.
During the company's fiscal second quarter, Coach's new chief executive officer, Victor Luis, said, "We have taken the initial steps in Coach's transformation across all aspects of the consumer experience -- product, stores, and marketing." Growth in emerging markets such as China, together with a new product mix and a focus on becoming a lifestyle brand, should act as catalysts for the stock going forward. With the stock now trading below $50 a share, I believe this is an attractive entry point for patient investors.
