Is a Coach Recovery in Store for Investors?

Is Coach a value stock to buy, or is it a retailer with too many lingering problems?

Jun 7, 2014 at 10:00AM
Coach Pic

Coach (NYSE:COH) came under pressure of Wednesday June 4, 2014 after brokerage Sterne Agee questioned Coach's outlook for growth and recovery. Nonetheless, Michael Kors Holdings Ltd. (NYSE:KORS) and Kate Spade & Co. (NYSE:KATE) continue to dominate the luxury handbag market, which brings about the questions of whether a Coach recovery is likely, and if investors should buy following large stock losses.

Sterne Agee hits Coach
Coach is one of America's leading luxury designers, mainly known for its handbags and accessories, with over 500 stores in North America. The company also has over 400 stores in the Asia/Pacific and a handful in Europe, which does not include its e-commerce channels. In total, Coach is a company with nearly $5 billion in 12-month revenue and a market capitalization of $10.75 billion.

Yet despite its large presence, Coach's stock has fallen 30% this year and found itself further pressured on Wednesday after Sterne Agee issued a downbeat note. The investment firm took the rating of Coach down to Neutral from Buy, and lowered its price target by $10 to $41. According to the analyst, the company's sales visibility remains low and any potential for a turnaround is too far away .

Coach continues to fall behind
Clearly, Coach has had a rough year, and the Sterne Agee downgrade is just one of many in the last five months. The problem for Coach is that its competitors such as Michael Kors and Kate Spade have come out with better selections for the last few seasons that have grown more popular with consumers who seek luxury bags.

Kors Store

In Michael Kors's last quarter it reported revenue growth of 53.6% year-over-year to $917.5 million, which resulted in a 26.2% increase in comparable sales . However, it was Michael Kors's European success and growing global brand that should really spook Coach investors, as the company brought in $164.6 million from Europe and grew 125% year-over-year.

Kate Spade Pic

Kate Spade has a large presence in luxury handbags, and also in other apparel. During its last quarter, sales rose 33.6% to $328 million, and its comparable sales grew an even better 43 %.

In contrast to the North American success of Michael Kors and Kate Spade, Coach's comparable sales declined 21 % in North America during its first quarter, and the company has relied solely on the growth of markets outside the U.S. The problem is that Michael Kors is now making its presence known in other countries, and Kate Spade is soon expected to enter many of the same markets.

Can Coach recover?
As for Coach, there are no indications that its second quarter will be any better than the first. The company has already attempted to sacrifice margins by discounting, but consumers simply haven't responded, which means the company needs new efforts. 

According to Coach CEO Victor Lewis, a multi-year turnaround is under way, and he says, "As our journey progresses, we have confidence in our vision of becoming a global lifestyle brand ." Yet much like consumers, investors are skeptical, as the company banks on new creative director Stuart Vevers to revive the 70-year old brand .

Unfortunately, fashion is an industry where it's hard to catch up when you're already behind, as it remains a space where the best companies stay ahead of trends. While Lewis is a good hire, Sterne Agee is correct in implying that the road toward a turnaround is long, and unfortunately investors are often impatient.

Final thoughts
With all things considered, Michael Kors and Kate Spade remain as strong as ever, and with their penetration of global markets Coach could have a much bigger problem than it has in North America. Coach is a company that seemingly doesn't have an answer for its large year-over-year losses, and even with a new creative head, it's going to take time for a recovery to occur. Hence, even if Coach returns to prior form, this is a stock that could still have large losses in front of it, as the road to recovery is long and Michael Kors and Kate Spade will not wait for Coach to catch up.

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Brian Nichols owns shares of Michael Kors Holdings. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach 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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