Does Coach's Steep Decline Represent a Long-Term Opportunity or Should Investors Avoid It at All Costs?

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Coach (NYSE: COH  ) , one of the most troubled companies in the retail industry today, has watched its stock plummet over the last year and weak earnings have played a primary role in this decline. In fact, the company has been unable to satisfy both earnings per share and revenue estimates for six consecutive quarters, and its struggles have been so intense in North America that there is no telling when this trend will end.

With this negative information in mind, Coach has scheduled its fourth-quarter earnings for release on August 5, so let's take a close look at its most recent release and the expectations for the upcoming report to determine whether the company has any shred of hope of meeting the estimates and also if its stock represents a long-term investment opportunity today.

Source: Coach

The troubling third-quarter results
On April 29, Coach released its third-quarter report and the results came in mixed compared to expectations; here's a breakdown:

Metric Reported Expected Year Ago
Earnings Per Share $0.68 $0.61 $0.84
Revenue $1.10 billion $1.13 billion $1.19 billion

Source: Estimize

Earnings per share decreased 19% and revenue decreased 7.4% year-over-year, and the company cited weakness in North America, its largest market, as the primary reason for the disappointing results. In North America, revenue decreased 18% to $648 million as declining sales in the company's handbags and accessories categories more than offset growth in other categories like menswear and footwear. Also, comparable-store sales fell a brutal 21% in this region as Coach noted "sharply lower traffic" at both its retail stores and website, and poor weather only made things worse. 

Source: Coach's Facebook

Coach performed much better internationally with revenue increasing 14% to $441 million, led by 25% growth in China and 10% growth in Japan. Comparable-store sales rose at a "double-digit rate" in these regions and the company noted growing demand. It is clear that the international market is the only thing keeping Coach relevant right now.

The collectively weak financial results above led to gross profit decreasing 11.2% to $781.3 million and operating profit decreasing 24.6% to $262.7 million; in relation, Coach's margins took major hits, as the gross margin contracted 300 basis points to 71.1% and the operating margin contracted 540 basis points to 23.9%. Part of why the company's margins contracted was that cost of sales increased 3.5% despite the steep decline in revenue. 

All in all, it was a terrible quarter for Coach and its stock responded accordingly by plummeting 9.34% in the trading session following the release. The shares have continued lower in the weeks since, setting new 52-week lows along the way, but strong fourth-quarter results could help prevent further losses.

What should you expect out of Coach?
Coach's fourth-quarter results are due out before the market opens on August 5 and the current estimates call for another quarter of negative growth; here's an overview:

Metric Expected Year Ago
Earnings Per Share $0.54 $0.89
Revenue $1.10 billion $1.22 billion

Source: Estimize

The estimates above call for earnings per share to decrease 39.3% and revenue to decrease 9.8% year-over-year, which would result in steeper declines than we saw in the third quarter and another sell-off could happen if Coach fails to achieve them. Other than the key metrics, here are five other things to watch for:

  1. Fiscal 2015 Outlook: It will be of the utmost importance for Coach to provide an outlook on fiscal 2015 that meets or exceeds the expectations of analysts; according to Estimize, the current consensus estimates forecast full-year earnings per share of $1.90 and revenue of approximately $4.2 billion.
  2. First-Quarter Outlook: Along with an adequate full-year outlook, it will also be crucial for Coach to provide a satisfactory outlook on the first quarter; the consensus estimates currently call for earnings per share of $0.46 and revenue of $1.0 billion, which would result in year-over-year declines of 40.3% and 13%, respectively.
  3. Margins: Coach's margins have taken a beating over the last few quarters, so investors will want to keep an eye on them to make sure the contraction does not accelerate. The company cannot afford to continually report declining revenue and increasing expenses like it did in the third quarter. 
  4. Store Closures: In June, Coach announced that it will close 70 of its 350 full-service retail stores in North America. The company plans to close these 70 underperforming locations in the first half of fiscal 2015 and focus on its twelve most successful markets, which generate approximately half of its total revenue from North America. Investors will want to watch for any updates regarding these closures because this process will be a key step in the company's quest to turn things around.
  5. Red-Hot Competitor: Investors will want to watch for Michael Kors' (NYSE: KORS  ) earnings release, which is also due out before the market opens on August 5. Currently, the consensus estimates call for the company to report earnings per share of $0.81 and revenue of $851.71 million, which would result in year-over-year growth of 32.8% and 32.7%, respectively. Michael Kors has been taking market share from Coach for quarter after quarter, so if Coach has any shot of regaining the luster it once had, it will need to come at the expense of its competitors; however, with the momentum Michael Kors is carrying, I highly doubt it will stumble in its upcoming release.

Source: Coach's Facebook

The Foolish bottom line -- Can Coach make a comeback?
If Coach can meet or exceed earnings per share and revenue expectations and satisfy the other elements listed in the section above, its stock could easily see a surge of buying given its large drop year-to-date. However, as mentioned before, the company has failed to meet both earnings per share and revenue expectations for six consecutive quarters and I am not confident that this quarter will be any different. Foolish investors should steer clear of Coach for the time being and instead take a closer look at Michael Kors as an investment opportunity today.

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Joseph Solitro

A fan of innovation, strong fundamentals, and all things baseball. Follow on Twitter @JoeySolitro. Fool on!

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