Coach Keeps Falling: Buying Opportunity or Dying Company?


Source: Coach.

Coach (NYSE: COH  ) is down by nearly 22% over the last year, as the company is delivering lackluster financial performance while competitors such as Michael Kors (NYSE: KORS  ) and Kate Spade (NYSE: KATE  ) capitalize on its weakness and gain market share in the high-end handbags and accessories market. Is the decline in Coach a buying opportunity, or is the worst yet to come for investors in the company?

Not so trendy anymore
Not too long ago, Coach used to be a vibrant company generating healthy growth rates and remarkable profitability for shareholders. However, the company has overexpanded its store base in the U.S. over the last several years, excessive pricing promotions are hurting the brand, and consumers seem to prefer trendier competitors such as Michael Kors and Kate Spade over Coach lately.

The company announced a decline of 7% in sales during the quarter ended on March 29. North America was a particularly worrisome market for Coach during the period -- total sales declined by 18% to $648 million, while same-store sales fell 21% and direct sales in North America dipped by 18% versus the same quarter in the prior year.

Management blamed the unusually cold winter and lackluster consumer spending for this disappointing performance. However, the fact remains that Michael Kors and Kate Spade are doing materially better than Coach while operating in the same environment, so the company needs to take responsibility for its problems and management missteps.

Michael Kors is clearly firing on all cylinders; the company announced a big sales increase of 51% during the quarter ended on Dec. 28 to $1 billion. Retail sales jumped 51.3% to $503.4 million, driven by a 27.8% increase in comparable-store sales and 98 net new store openings, while wholesale revenues grew 68.2% to $461.4 million, and licensing revenues increased 59% to $47.4 million.

Importantly, Michel Kors sales in North America increased by 51% on the back of a big jump of 24% in comparable-store sales during the quarter. Michael Kors is clearly leaving Coach in the dust, especially in North America, and that's hardly related to weather conditions or macroeconomic factors.

Kate Spade is scheduled to announce earnings for the first quarter of 2014 on May 8; still, just like Michael Kors, Kate Spade is doing materially better than Coach judging by numbers from the fourth quarter of 2013.

Net sales of Kate Spade products increased by 48% during the quarter to $256 million. The company expanded its Kate Spade retail square footage by 52.5% versus the prior year, and comparable direct-to-consumer sales increased by 30% during the period.

Reasons for hope
Not everything was bad news for Coach during the last quarter, though. International markets performed remarkably well, with a total sales increase of 14% to $441 million. International sales were even stronger on a constant currency basis, with a year-over-year jump of 20% during the period.

Sales in China, a particularly important market for the company, increased by a strong 25% during the quarter, and management estimates the business is on track to generate more than $540 million in sales in the country during 2014.

Management is also quite optimistic about prospects for its men's business, which is expected to produce $700 million in sales this year, a 20% increase versus 2013.

Coach's new creative director, Stuart Vevers, is working on reinvigorating the brand, and his new collection was introduced at New York Fashion Week in February. According to management: "The collection got a significant attention and the global press was uniformly positive bringing Coach into the fashion conversation."

If the company's renewed collection can in fact strengthen the brand image and reverse the declining sales trend in North America, Coach could offer substantial upside potential from currently depressed levels.

Merchandise from Stuart Vevers' new collection will be reaching stores in September, and investors in Coach have important reasons to closely monitor its performance, as it could mark an inflection point when it comes to evaluating Coach and its chances of turning the business around in the medium term.

Foolish takeaway
Coach's declining sales in North America are a big reason for concern, especially considering that competitors Michael Kors and Kate Spade are clearly stealing market share away from Coach. On the other hand, strong international performance and healthy growth in men's products offer reasons for hope.

Investors looking to make a safe decision may want to wait for Stuart Vevers' new collection to reach the stores in September in order to make a clearer assessment about the company, as this could be a major defining point for Coach over the coming months.

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