Coach (TPR 1.11%) has had a rough 2014, and its stock has taken a nosedive as a result. Coach's stock has declined almost 40% in 2014 alone, while its competitors Michael Kors Holdings (CPRI -0.05%) and Kate Spade (KATE) have realized appreciation in their respective stock prices.
Coach's stock has fallen as a result of increased competition from Kors, Kate Spade, and other luxury fashion brands and retailers. Its latest quarter displayed this increased competition, as Coach's revenue declined by 7% to $1.1 billion from $1.19 billion in 2013's third quarter. The decline in revenue affected the bottom line significantly, with net income falling 20% to $191 million and earnings per share falling 19% year over year to $0.68. Coach's CEO, Victor Luis, also noted that the company realized muted traffic in its stores in the recent quarter.
Some good news
The news was not all bad for Coach, as Luis also noted that the company grew sales in its men's division and increased sales in Asia and Europe. Sales in China alone grew more than 25% in the quarter. Moreover, international sales rose 14% to $441 million from $385 million in the year-ago quarter. Coach's financial results for the recent quarter were mostly a result of its declining business in North America, with North American sales falling 18% to $648 million from $792 million in 2013's third quarter.
Additionally, the sales declines over the first nine months of fiscal 2014, which include the recent third quarter, are not as extreme as 2014's third quarter alone. For the first three quarters in fiscal 2014, sales declined at a less drastic margin of 5% to $3.67 billion from $3.85 billion during the same period in 2013. The bottom line was also less affected, as net income declined 13% to $706 million from $813 million and EPS fell 12% to $2.51 versus $2.84 in the first nine months of 2013.
Is now the time to buy?
The decline in Coach's stock has made it a bargain in some respect versus its peers:
|
P/E |
Forward P/E |
P/CF | |
|---|---|---|---|
|
Coach |
10.9 |
17.1 |
9.7 |
|
Michael Kors |
28.3 |
23.1 |
29.7 |
|
Kate Spade |
80 |
61.3 |
-83.3 |
Data Source: Morningstar
Coach's precipitous decline in 2014 has led to some interesting valuation metrics. Coach's current P/E of 10.9 is a discount to its industry's average and the S&P 500 index's at 21.3 and 18.6, respectively. Therefore, Coach's stock trades at almost half the valuation of the rest of its industry and the overall market on a P/E basis.
Coach is also the bargain on a forward P/E basis compared to Kors and Kate Spade. Coach's forward P/E being higher than its trailing P/E is due to analysts' earnings estimates calling for a decline over the next 12 months.
Coach really shines on a cash flow basis with a P/CF of 9.7, which is lower than its industry's average of 29.1 and the S&P 500's 11.2. Therefore, investors are not paying much for a company with strong cash flow. Its strong cash flow is evident in its dividend yield of 3.8%, which could be especially attractive to investors looking for yield and income. Neither Kors nor Kate Spade currently pay a dividend.
Foolish takeaway
The fashion industry can be fickle, and consumers can switch fast from brand to brand as they have done to some extent with Coach. Nonetheless, Coach's valuation and dividend make it worth taking a look. It's also a company that is still profitable and generating cash. Coach also has the luxury of having no long-term debt, giving it the flexibility and financial wherewithal to compete against its competitors and take back market share.
Coach will attempt to turn around its North American business, but its business internationally is doing extremely well. The company's financial position combined with its growing business elsewhere will help Coach to win back customers and reverse the declines in North America.
