After a Crash, Can Coach Stage a Comeback?

Source: Coach

After the company reported revenue and earnings results for the third quarter of its 2014 fiscal year, shares of Coach (NYSE: COH  ) plummeted 9% to close at $45.71. Now, with shares of the designer trading just off their 52-week low and at a 24% discount from their 52-week high, should investors consider the company a bargain or would other opportunities like Ralph Lauren (NYSE: RL  ) or Michael Kors (NYSE: KORS  ) make more sense?

Coach disappointed big time!
For the quarter, Coach reported revenue of $1.10 billion. Its revenue fell 8% from $1.19 billion in the year-ago quarter to narrowly miss the $1.13 billion that investors had hoped to see. Even though it enjoyed higher international sales, particularly in China where sales rose 25%, the business's North American operations were hit by a 21% decline in comparable-store sales.

From a profitability perspective, Coach partially redeemed itself. For the quarter, the business reported earnings per share of $0.68. Even though this represented a 19% decline from its result of $0.84 in the third quarter of 2013, it surpassed the $0.61 forecast by 11%.

Source: Coach

In addition to the negative effect from falling revenue, management attributed the decline in profits to rising costs. During the quarter, Coach reported that its cost of goods sold rose from 25.9% of sales to 28.9%, while its selling, general, and administrative expenses increased from 44.8% of sales to 47.2%. Although the company did not disclose the cause of these increases in the release, they likely resulted from a combination of merchandise discounting and decreased economies of scale that come along with the decline in revenue.

Source: Coach (Coach)

Does Coach still stack up to its peers?
Over the past three years, Coach has done pretty well for itself. Between 2011 and 2013, the company's revenue soared 22% from $4.16 billion to $5.08 billion. On a percentage basis, the main driver behind Coach's growth was its international segment, which saw its revenue climb 34% from $1.15 billion to $1.54 billion as the company enjoyed improvements in comparable-store sales and added stores on a net basis.

However, the largest nominal contributor to Coach's success during this time-frame has been the company's North American segment, which has seen its revenue increase 17% from $2.97 billion to $3.48 billion. Modest growth in comparable-store sales drove this growth to some extent, but it mostly resulted from increased store count.

While Coach performed decently over this time-frame, rivals like Ralph Lauren and Michael Kors did better. Between 2011 and 2013, Ralph Lauren saw its revenue climb more than 23% from $5.66 billion to $6.94 billion. Most of Ralph Lauren's top- line improvements took place between 2011 and 2012 when its revenue jumped 21% because of a 14% increase in comparable-store sales, along with higher online sales and new retail locations in operation.

KORS Revenue (Annual) Chart

KORS Revenue (Annual) data by YCharts

The best performer over this three-year period was Michael Kors. Over this time-frame, the company saw its revenue skyrocket by 172% from $803.3 million to $2.2 billion. Although the business enjoyed a significant increase in revenue in its wholesale and licensing operations, its retail operations have been its main growth driver over the past three years.

During this period, the company's retail revenue soared 209% from $344.2 million to $1.06 billion, driven by a 78% increase in store count from 113 locations to 201. Comparable-store sales jumps also made a major contribution to the company's revenue gains during the past three years. In North America and Europe, the company's comparable-store sales increased by aggregates of 190% and 110%, respectively.

Foolish takeaway
Based on the data provided, it's not too hard to tell why Coach's shares fell so hard. Yes, the business did report higher-than-anticipated earnings but the revenue shortfall serves as a warning sign that the company's situation is anything but great.

Admittedly, Coach has had a strong performance record recently but its sales growth has been slightly slower than that of Ralph Lauren and can't come close to touching that of Michael Kors. Moving forward, it will be interesting to see what becomes of the company. However, for the Foolish investor who is looking for strong growth, either of its competitors might make for more appealing prospects.

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