Coach, Inc.'s Transformation Just Got a Little Less Expensive

Coach's lofty transformation plans are no longer expected to cost $300 million. Here's what investors need to know.

Jul 7, 2014 at 2:22PM


Coach will soon close up to 70 underperforming stores. Source: Coach.

Thanks primarily to a costly transformation plan unveiled a few weeks ago, shares of Coach, Inc. (NYSE:COH) have fallen more than 10% over the past month. But according to a recent SEC filing, that transformation is now expected to cost much less than Coach originally anticipated.

When Coach first told investors of its multiyear plan -- which includes updating its global store fleet, realigning inventory levels, closing roughly 70 underperforming retail stores in North America, and implementing various organizational efficiencies -- it estimated the efforts would result in pre-tax charges of $250 million to $300 million between its fiscal fourth quarter 2014 and throughout fiscal 2015.

Last Wednesday, however, shares of Coach quietly climbed more than 2% after an amended SEC filing provided an updated estimate of those costs. Specifically, Coach says it was previously "unable to provide good faith estimates of the amount ... for each major type of cost" associated with the plan. Now, however, Coach provided the following estimates for charges related to its transformation:

  • $75 million to $85 million related to inventory realignment (of which $15 million to $25 million will be cash)
  • $45 million to $60 million for store closures (of which $40 million to $50 million will be cash)
  • $30 million to $40 million in non-cash impairment charges
  • $15 million to $20 million in non-cash accelerated depreciation of existing store assets
  • Up to $15 million of "other related, but individually insignificant, costs" (of which up to $10 million will be cash)

So why did Coach stock jump last week? In short, add the above estimates together and this means it now expects its transformation to cost somewhere in the range of $180 million to $220 million, or roughly $75 million less at the midpoint than its previously expected range. What's more, "only" $65 million to $80 million of that total will be cash, which won't put much of a dent in the $775 million cash hoard held by Coach at the end of its most recent quarter.

Of course, this still doesn't guarantee Coach's transformation will be an automatic success. And it doesn't take the sting away for Coach investors who have watched competitors like Michael Kors and Kate Spade continue to grow like weeds and take market share in the crucial North American market, where Coach last fiscal year derived nearly 69% of its total sales.

But it should put Coach in the perfect position to ready itself for the September launch of the critically acclaimed debut collection from its new creative director, Stuart Vevers. This, in turn, will set the stage for what Coach CEO Victor Luis has described as a "multi-year journey that ensures both brand vibrancy and healthy, long-term growth."

As a long-term investor myself, knowing Coach's long-term plans will now cost less to implement only sweetens the deal.

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Steve Symington owns shares of Coach. The Motley Fool recommends and 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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