Coach (NYSE:TPR) has been one of the most disappointing stocks so far this year. Shares of Coach have underperformed the S&P 500 index by more than 25 percentage points year to date. More specifically, Coach's stock is down 25% year to date, while the S&P 500 is flat.

This comes as Coach recently announced that fiscal first-quarter sales in North America were down 18% year over year. And comparable-store sales fell 21% in North America. North American comps have fallen in five of the last six quarters. Shares fell more than 12% during the last week on the news.

North American market share
Coach still owns North America when it comes to market share. While it might not be in a place to grow this market share, it can still protect what market share it has. That's where the transition to a lifestyle brand comes into play as well as new designs. New products from Stuart Vevers (formerly at Mulberry) will hit stores later this year.

The other good news is that international sales continue to grow and were up 14% for the quarter. China was one of the key drivers for international growth--China sales were up 25%, and comparable-store sales saw double-digit growth. Japan also grew sales by 10% year over year.

Other bright spots for Coach
Coach wants to be a lifestyle brand, which would help it hedge the slowdown in handbag sales, but that'll take time. However, the opportunity is large. Coach believes that the global market for premium footwear and outerwear is just as large as the handbag market.

Out of the 28 analyst ratings for Coach, there is still only one sell rating. Coach has had five straight years of dividend increases. The current dividend yield is at 3%, which is the highest it's been since first offering a dividend in 2009.

Who's capitalizing on Coach's weakness?
Coach is losing market share to Michael Kors Holdings (NYSE:CPRI) and Kate Spade (NYSE:KATE) in North America. It might not be so much that these retailers are capitalizing on Coach's weakness but that they're actually causing the weakness.

Kate Spade is one of the newest pure plays in the handbag and accessory market. It is divesting Juicy Couture and Lucky Brand and is now focused on the Kate Spade brand. Kate Spade hired a new CEO earlier this year, which only further streamlined its focus on handbags, etc. The U.S. still accounts for more than 80% of Kate Spade's revenue, which means Coach has the advantage when it comes to international exposure. 

The biggest threat to Coach
Currently, Kors is probably one of Coach's biggest competitors. It has a lot going on, which helps make the company a growth story in the accessory market. The first is attacking the e-commerce market. Kors is assuming control of from Neiman Marcus. It'll launch the site in North America this year and then in Europe in 2015.

Kors is now expanding its retail presence in North America. Last fiscal year it converted 500 existing department store doors into branded shop-in-shops. Now it has more than 1,300 shop-in-shops globally. Kors is also gaining strength in the global market. It's using licensing deals to expand its brand in new countries. Meanwhile, it's digging deeper into the men's business. This is a strategy that Coach and Kate Spade (with its Jack Spade brand) are both undertaking as well.

How shares stack up
Unlike most turnarounds, Coach has a pristine balance sheet and generates impressive levels of free cash flow. Its cash position more than covers the debt on the balance sheet. More than 5% of its market cap is covered by net cash.

The margins and cash flow generation is impressive. Its return on equity is 40% and its free cash flow yield (free cash flow divided by market cap) is 7.5%. Not even Michael Kors can keep up with Coach's cash flow. Michael Kors' free cash flow yield is 2%. Its free cash flow margin (free cash flow divided by sales) is 12% compared to Coach's 18%. Coach also trades the cheapest of the three on a P/E basis. It trades at a P/E of 12.8, while Kors' P/E is 31 and Kate Spade's 59.

Bottom line
Coach appears to be trading in deep value territory. Its P/E ratio is well below its peers, but it also offers an enticing dividend yield. For investors looking for a turnaround play in the high-end accessory market, Coach is worth a closer look.