Investors could be forgiven for writing off Coach (NYSE:COH) as a lost cause. The designer-handbag retailer has struggled to regain its footing in the U.S., and the market has all but given up on its hopes of ever recovering. However, investors who dismiss Coach as a has-been category leader may be ignoring a potentially good investment. Although far from guaranteed, there are three good reasons why Coach's stock could rise.
Conquer the world
Coach may be struggling in North America, but it's growing by leaps and bounds overseas. In its fiscal year 2014 that ended June 28, Coach's North American comparable-store sales declined by double digits, while its Chinese comparable-store sales increased by double digits. China sales grew by 20% to more than $500 million – more than 10% of Coach's total sales. Growth in China came in even as overall revenue declined, making the emerging economic superpower a key component of Coach's long-term growth plan.
If impressive growth in China doesn't convince investors that Coach's international ambitions could add significant value in the coming years, the company's success in Japan may do the trick. Japan is Coach's second-largest market, behind only North America. Roughly 20% of Coach's directly operated stores are in Japan, and sales were flat in the region due to its maturity. Still, it is performing much better than the mature U.S. market, where sales are declining. Coach's staying power in Japan proves that it can export its brand eastward and establish a long-term presence in a country with a different consumer culture than the U.S. If the company has similar success in China, Coach's international business could soon eclipse its domestic business.
Moreover, Coach still has room to grow in Europe. The company did not have a meaningful presence on the continent until midway through 2012. Even now, the company has just 27 directly operated stores in the region. Coach could have a huge untapped growth opportunity in Europe if the eurozone economies improve, leading to profitable growth in its international segment.
The man purse
Coach may be struggling to grow sales of women's handbags, but it is having no trouble attracting men to its brand. Last year, sales of men's briefcases, messenger bags, wallets, belts, and similar goods grew 15%, to $692 million. That's just 14% of Coach's overall sales, but it's up from 9% of sales just two years ago.
In fact, men's handbags and accessories is Coach's fastest-growing product category. Management estimates that the $7 billion men's category will grow worldwide by about 10% per year during the next five years, outpacing growth in the women's category. The company is building dual-gender and male-only stores to drive sales of men's products.
If Coach can capture a 20% global share of the men's category, and the category grows 10% per year, the category will contribute more than $2.25 billion to Coach's sales in just five years. That's a 47% increase on Coach's current sales base. Even if Coach comes up a bit short, men's products represent a strong source of growth that can buy time for management to solve its North American women's handbag problems.
Coach is revamping its product lines in an effort to reverse the declining sales trend in North America. The company installed Stuart Vevers last September to serve as creative director. Vevers is a renowned luxury leather goods designer who previously transformed design at Mulberry (LSE:MUL) and LVMH Moet Hennessy Louis Vuitton (NASDAQOTH:LVMUY)-owned Loewe, with additional experience at Bottega Veneta, Givenchy, and Louis Vuitton. He was named Accessory Designer of the Year at the 2006 British Fashion Awards for his work at Mulberry.
Now, Vevers hopes to reinvigorate Coach's line and refresh consumer interest in the brand. His new Coach collection made a splash at New York Fashion Week last February, with InStyle Magazine calling it "a markedly modern (even, dare we say it, edgy) departure from the past. News flash: Coach is cool." Vevers told the magazine that he wanted to "push forward a new aesthetic" while maintaining Coach's reputation for "beautiful, well-crafted pieces." Vevers' collection debuts in stores this fall.
Fashion is hard to get right, so there is no telling whether Vevers' hire will solve Coach's domestic woes. However, there is precedent for strong fashion brands reigniting growth after a change in creative direction. Marc Jacobs did it at Louis Vuitton and Reed Krakoff did it at Coach in the mid-1990s. Now, all we can do is wait to see if Stuart Vevers can join the list of designers who remade brands with wild success. If he pulls it off, shareholders will be rewarded.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. 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.