Coach (COH 1.59%) was once the most-loved handbag maker in the United States, but it has since become just another company in one of the most competitive industries. The last few quarters have been disappointing, causing many investors to sell their positions, but others believe the stock will return to glory. Let's take a look and see if things will get better in its upcoming report or if we should continue avoiding this depressed stock.
The handbag maker
Coach is a global leader in premium handbags and accessories. The company currently operates more than 500 locations in North America, more than 400 locations in Asia, and 20 in Europe. Coach also operates e-commerce websites in the United States, Canada, Japan, and China.
Last time out
On Oct. 22, 2013, Coach released first-quarter results for fiscal 2014. The results were mixed compared to analyst estimates and looked like this:
| Metric | Reported | Expected |
|---|---|---|
| Earnings per share | $0.77 | $0.77 |
| Revenue | $1.15 billion | $1.19 billion |
Earnings per share were flat and revenue decreased 1% year over year, hindered by comparable-store sales falling 6.8%. Gross profit declined 2.2% to approximately $826.6 million as the company's gross margin decreased 100 basis points to 71.8%. This was a disappointing quarter, but management responded by saying, "Beginning now and throughout the holiday season, consumers will see a fuller expression of the Coach brand ... Our intent is to drive brand relevance and increase Coach's resonance with our consumers." I believe Coach knew it was in need of a new image in order to bring back the customers who flocked to other brands, and this may have been the beginning of the transformation.
The expectations
For the second quarter of fiscal 2014, analysts expect a quarter of declines. Here are the current expectations compared to the results from the same period a year ago:
| Metric | Expected | Year-Ago |
|---|---|---|
| Earnings per share | $1.12 | $1.23 |
| Revenue | $1.49 billion | $1.50 billion |
These expectations call for earnings to decrease 8.9% and revenue to fall 0.7% year over year. Although many of Coach's recent earnings releases have come in below analyst estimates, none have included declines in both earnings and revenue, until now. If the estimates become reality, it could spell disaster for the company's stock.
What needs to happen
A quarter of declines will not help instill confidence in its investors, but Coach needs to comment on the status of its new offerings and what it is doing to compete in the marketplace.
In the first quarter, Coach brought in a new executive creative director, Stuart Vevers, and his leadership, along with the creative team at Coach, is expected to transform the company in every way possible. In the first-quarter report, the company stated, "[W]e moved forward with our transformation initiatives across all consumer touch points -- product, store environments and marketing -- focused on addressing the competitive handbag and accessories category in North America." This was the beginning of the long-overdue facelift within the company, so hopefully the process is going smoothly, or we may have another crisis on our hands, like when Ron Johnson tried too much too quickly at J.C. Penney.
Industry strength
As Coach has struggled, two of its largest competitors, Michael Kors (KORS +0.61%) and Tiffany (TIF +0.00%), have been showing immense strength. Take a look at the comparison of each company's latest quarter:
| Company | Coach | Michael Kors | Tiffany |
|---|---|---|---|
| Earnings growth | 0% | 44.9% | 49% |
| Revenue growth | (1%) | 38.9% | 6.9% |
| Comp-store sales | (6.8%) | 22.9% | 7% |
| Margin expansion | (100 basis points) | 150 basis points | 260 basis points |
As you can see, the luxury-goods industry is growing, but Coach is not. Michael Kors has been reporting record earnings and its expansion plans could continue driving growth for the next decade. Tiffany reported a great quarter as well, but then lost a lawsuit to Swatch, and this caused the company to lower its full-year earnings outlook to $2.30-$2.35 from $3.65-$3.75. Of the three, Michael Kors is by far the best play in the industry for 2014.
The Foolish bottom line
Coach was once an American icon, but its struggles have become more talked about than its handbags. It is expected to report year-over-year declines in the upcoming quarter and analysts believe this trend could continue for the rest of the year. I would not be a buyer of Coach going into the report or after the release, because I think there are better investment opportunities out there, like Michael Kors.
