Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is a Coach Recovery in Store for Investors?

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.

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 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.

Coach's future may be uncertain, but this top stock looks poised for long-term gains
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 07, 2014, at 1:01 PM, brenoboyle wrote:

    I have been wondering the same. I've passed on COH before (luckily), but sooner or later the valuation may become too compelling. Another 10% markdown and I would have to think harder about whether it's time to buy.

    But I think there are safer turnaround plays in retail right now, PETM and BBBY in particular.

  • Report this Comment On June 08, 2014, at 4:56 PM, BrianNichols wrote:

    Retail as a whole is tough, but in luxury, when a brand is hot there's no stopping it, until it's no longer in favor

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2986218, ~/Articles/ArticleHandler.aspx, 8/29/2015 1:11:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated 15 hours ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:01 PM
COH $29.96 Down -0.14 -0.47%
Coach CAPS Rating: ****
KATE $18.88 Up +0.46 +2.50%
Kate Spade & Compa… CAPS Rating: **
KORS $43.17 Down -0.11 -0.25%
Michael Kors Holdi… CAPS Rating: ****