After Starting 2014 With a Whimper, Can Coach Turn It Around?

Source: Coach

Shareholders in luxury-goods maker Coach (NYSE: COH  ) haven't had much to cheer about over the past year, as the company has been a losing bet, down more than 30% over that time period. Coach has been hurt by a lack of sales momentum, especially in North America, a stark contrast to the growth being exhibited by competitors Kate Spade (NYSE: KATE  ) and Michael Kors Holdings (NYSE: KORS  ) .

Coach's latest fiscal quarter was another poor showing, evidenced by a top-line decline that included a double-digit drop in comparable-store sales. On the upside, though, the company has been finding success in select international markets, especially in China where it is growing at a double-digit pace. So, should investors try to time the bottom with Coach?

What's it worth?
Coach has come a long way from its inception as a family owned workshop in a New York apartment, currently operating one of the world's top luxury-goods franchises with a global distribution network that encompasses 30 countries, mostly focused on the North American and Asia-Pacific regions. 

The company has leveraged the immense popularity of its trademark handbags to create a lifestyle brand with an assortment of licensed product lines, including footwear, jewelry, and fragrances. The net result for Coach has been a highly profitable business model that has funded an expanding retail network around the world, helping it to post higher sales tallies in each of the past four fiscal years.

Unfortunately, FY 2014 is shaping up to be a different story for Coach, highlighted by a 4.7% top-line decline that has been a function of a steep comparable-store sales decline in its North America geography, the source of roughly two-thirds of its total sales. In addition, the company has been hurt by its strategic decision to increase its exposure to the outlet channel, a move that has pressured its gross margin. Not surprisingly, Coach has found profit growth hard to come by, evidenced by a 15.4% decline in its operating profit during the period.

Losing ground to the competition
Even worse, Coach's growth troubles have come during a strong period for some of its competitors, like Kate Spade. The handbag maker had a very strong year in 2013, with its Kate Spade unit reporting a 60.9% sales increase, thanks to more productive stores and a sizable expansion of its store base around the world. More importantly, that sales momentum has carried over into 2014, highlighted by a double-digit comparable-store sales performance for its Kate Spade unit in its latest fiscal quarter. 

Combined with the cash proceeds from the sale of the company's non-core businesses, the higher profit for the unit has allowed Kate Spade to continue investing in its retail network, creating a more formidable challenger for Coach.

Michael Kors also continues to grow at a fast pace, reporting a 51.3% top-line gain in its recently completed fiscal year that was a function of strength across its major distribution channels. Like Coach and Kate Spade, Michael Kors has been investing heavily in its retail network, a strategy that continued to pay dividends during the period with strong comparable-store sales growth, up 26.2% versus the prior-year period. 

Just as importantly, the company has been successful at generating high-margin sales through the licensing channel, especially in the watch and footwear categories. This has kept its operating margin high and its balance sheet healthy, thereby allowing management to target an even larger store footprint going forward.

The bottom line
Coach is undoubtedly a cheap stock, thanks to a downward price trajectory that shows no sign of letting up. However, there seems to be a valid basis for that price action, given Coach's lack of overall sales momentum, which has resulted in fading hopes for near-term profit growth. As such, until the company finds a way to turn around its declining fortunes in its key North American market, investors would probably be better off looking for greener pastures elsewhere in the luxury- goods sector.

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