Why Under Armour and Coach Are Moving in Separate Directions Today

As far as the world of apparel goes, Coach (NYSE: COH  ) and Under Armour (NYSE: UA  ) don't exactly have much in common these days. To be sure, two ratings changes by analysts today effectively tell the stories of these divergent businesses.

Coach is definitely not the new black
Let's start with the "bad" news. Shares of Coach fell by as much as 3.5% this morning, after Ike Boruchow, an analyst at Sterne Agee, downgraded the luxury apparel specialist to neutral from buy. 

Boruchow cited Coach's deteriorating North American business, which he doesn't think is likely to rebound in the near term. He also doesn't like Coach's weakening balance sheet and cash flow metrics, and believes Coach's earnings will likely drop going forward. As a result, Boruchow lowered his price target on Coach shares to $41 from $51.

I own shares of Coach; therefore, I know all too well that its North American segment is struggling badly, as up-and-coming competitors like Michael Kors take market share. In fact, Michael Kors saw North American revenue skyrocket 43% year over year in its most recent quarter, to $739 million, while Coach's sales dropped 18% during the same period in its most important region, to $648 million.

Remember, however, that Coach's most-recent quarter wasn't all bad. International sales, for example, increased 20% on a constant-currency basis, including 25% growth in China. What's more, Coach is looking forward to the September launch of the debut collection from its new creative director, Stuart Vevers, which has enjoyed an overwhelmingly positive response from fashion industry critics.

That might seem like an eternity to wait for our impatient market, but with shares currently trading at just 12 times last year's earnings, I'm perfectly happy holding on and collecting Coach's hefty 3.3% dividend.

Under Armour is still dominating
On a more encouraging note, shares of Under Armour are currently up around 5%, thanks to an upgrade to buy from neutral from Jefferies analyst Randal Konik. Konik also increased his price target on Under Armour shares to $65 from $50.


Source: Under Armour

Specifically, Konik states that a recent survey shows Under Armour's dominance with younger consumers and women is growing. At the same time, men continue to buy Under Armour's innovative athletic apparel at an impressive clip. As it stands, Konik thinks the market is underestimating Under Armour's long-term growth potential, and speculates sales could exceed $15 billion during the next decade.

That's a big jump considering Under Armour's current 2014 guidance calls for revenue in the range of $2.88 billion to $2.91 billion. Still, it seems especially feasible when you note that more than 90% of Under Armour's revenue in the most recent quarter came from North America, and it's only just beginning to really push its international expansion now.

In fact, despite a huge run-up during the past few years -- as well as concerns that the remainder of this year may not look as impressive as its blowout first-quarter report -- I had no problem adding more shares of Under Armour to my personal portfolio only a few weeks ago.

Foolish takeaway
In the end, despite their significantly different analyst opinions today, Coach and Under Armour do have something in common for me: I plan on holding shares of both companies for years to come. Over the long term, today's seemingly big movements will likely amount to little more than a blip on the radar.

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Related Tickers

11/26/2014 3:10 PM
COH $36.64 Down -0.45 -1.21%
Coach CAPS Rating: ****
KORS $75.68 Down -1.14 -1.48%
Michael Kors Holdi… CAPS Rating: ***
UA $71.59 Up +0.92 +1.30%
Under Armour CAPS Rating: ****

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