If you own shares of Coach (NYSE:COH), you have probably already viewed the company's fourth-quarter earnings results, which were released last month. The struggling luxury retailer surpassed expectations, but it still has its work cut out for it. Coach's management provided critical insights on the post-earnings conference call. Let's take a look at the five most important things that management wants you to know.
Coach is still dragging its feet in North America
Coach's sales of women's bags and accessories in North America have been a sore spot at the company for several quarters. The company's fiscal 2014 North America sales topped $3.1 billion, roughly $200 million less than in fiscal 2012. Its gross profit declined by over $270 million in the same period. The decline is largely due to challenges in women's bags and accessories, which declined 10.5% worldwide in fiscal 2014.
Coach's decline is in stark contrast to the state of the market. Management openly admits that the market is growing despite Coach's declining sales. "Overall, we estimate that growth in the North American premium women's market, excluding moderate trends, grew at a high-single digit rate, topping $11 billion, as bags and accessories continue to represent a growing portion of her wardrobing spend," says CEO Victor Luis. This means that Coach is losing market share – bad news for investors if this trend doesn't turn around soon.
Coach is growing internationally
While Coach struggles to find its footing in North America, growth is coming far easier in China and Europe. China, Coach's fastest-growing market, grew 25% to $545 million in sales in fiscal 2014. Comparable store sales also grew at a double-digit pace. Coach has 153 stores in China, more than any market outside of North America and Japan. Continued growth in the country could offset declines in North America.
The company is also expanding in Europe. Coach has just 27 stores on the continent, but management has high hopes for the region. Luis gushed:
In Europe, where our brand is small, but growing rapidly, we generated significant sales growth at POS and double-digit comps in the quarter. We continue to believe that Europe represents a significant long-term opportunity for Coach, both with domestic shoppers and the international tourists, notably in key European cities, where the affordable luxury segment is outperforming traditional luxury.
Coach has a huge opportunity in men's products
Although Coach's lineup of women's bags and handbags is losing traction, the company's men's line is experiencing solid growth. Sales of men's bags, leather goods, and accessories nearly reached $700 million in fiscal 2014 – that's double its sales in fiscal 2013. Moreover, management expects men's sales to grow to $1 billion in fiscal 2017. That's 12.6% annual growth – even faster than the women's market is growing. Management is excited about the category:
Looking ahead, we remain bullish about the prospects of our men's global business. However, given the announced brand transformation initiatives, including slower global distribution growth and the planned pullback in our North America e-outlet business this year, we are now targeting $1 billion in sales in FY '17, one year later than our original target.
Stuart Vevers is leading a brand reset
Coach brought in renowned leather goods designer Stuart Vevers to transform its collection. Vevers is directing the traditionally conservative brand in what one fashion writer describes as a "new, edgier territory." Although the company risks tarnishing its brand with such a departure from its traditional design, Coach desperately needs to differentiate itself from competing offerings. Management hopes that Vevers can pull off the change across all product categories, not just women's bags and accessories:
Most importantly, we laid the groundwork for our transformation to a modern luxury lifestyle brand across all key consumer touch points, product, stores and marketing. A crucial milestone was the arrival of Executive Creative Director, Stuart Vevers, last September, who has already had a significant impact on the creative direction of the brand. This was highlighted by our first New York Fashion Week presentation in February, and the editorial praise his inaugural collection received globally.
Even as it struggles, Coach is still cash-rich
Despite enduring one of the most difficult periods in its corporate history, Coach remains firmly cash flow positive. You'd be hard-pressed to find someone who believes Coach is going out of business. Strong cash flow provides a huge safety cushion for investors. This is extremely important for shareholders as it gives Coach time to reset its offering.
Management believes that the recovery could come as soon as fiscal 2016:
In closing, our transformation required substantial investment and focused execution. We have a clear strategy and a well-articulated implementation plan for FY '15. We expect to realize a positive impact on the annual financials beginning in FY '16 with FY '17 being the year when we return to growth in line with the category.
North America operations are struggling, but international sales and men's products are growing by double digits. Stuart Vevers could revitalize the struggling women's collection, and strong cash flow buys Coach time to get its brand in order. If management is right, shareholders could be rewarded sooner rather than later.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Coach and Nike. The Motley Fool owns shares of Coach and Nike. 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.