Cautious on Coach, Despite China Growth
Coach (NYSE:COH) is a leading American retailer of luxury lifestyle handbags and accessories. The company primarily competes with other premium apparel and accessories players like Polo Ralph Lauren (NYSE:RL), Liz Claiborne (NYSE:LIZ), and AnnTaylor (NYSE:ANN). We estimate that the handbags division is the most valuable division for Coach, generating 57% of the $55 Trefis price estimate for Coach’s stock.
In fiscal 2009, the company acquired the Coach domestic retail businesses in Hong Kong, Macau and mainland China (‘‘Coach China’’) from its former distributor, the ImagineX group. [1] These acquisitions provide the company with greater control over the brand in China, enabling Coach to raise brand awareness and aggressively grow market share with the Chinese consumer.
Over the last few years, Coach has gained increasing popularity in the region – with sales increasing more than 3x in 2010. Although the $55 Trefis price estimate for Coach’s stock remains 4% below current market value, we do not see any further upside from rapid expansion opportunities in China.
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The Chinese Opportunity
China offers a tremendous growth opportunity to Coach with a number of factors playing in its favour:
1. Coach’s Low Recognition in China’s Huge Luxury Market
The Chinese luxury market grew to $23 billion in 2009 and is poised to become the largest luxury market in time. While Coach reported double-digit growth in comparable store sales during fiscal 2010, increasing its market share to 5%, it is still not a widely recognized brand in China (with only 8% brand awareness). This offers a tremendous opportunity for Coach to gain share in the Chinese luxury market through aggressive and targeted marketing. [2]
2. Coach’s “Accessible” Luxury Brand Image and China’s Rising Middle Class
Coach, in keeping with its Asia-focused strategy, has positioned itself as an “accessible luxury brand” in China and has accordingly gained popularity among the rising middle class of China. With China’s middle class estimated to reach 700 million by 2020, making up 48 percent of the nation’s population, and its annual income climbing to an average of $17,700 in the next 10 years (according to Euromonitor International, a market research firm), [2] the middle class will be the main driver of the luxury market in China.
Coach has forecasted a 75% year-on-year growth in sales in China during fiscal 2011 and expects China to surpass Japan as its 2nd largest market within 5 years. [2]
Why the Downside Potential?
We have already accounted for the expected growth in number of Coach China stores (72 by the end of 2011 and 160 by the end of our forecast period) in our estimate for Coach’s stock. However, if sales in China grow at the pace anticipated by company management (75% in 2011), it would translate to an estimated 12% increase in revenue per square feet of Coach China stores in 2011 vs. our current growth estimate of 20%. This would decrease daily revenue per Coach China Store from handbags as well as belts, wallets, wristlets & others. Although the difference does not generate material downside to our $55 Trefis price estimate for Coach’s stock, we note that the dramatic growth prospects for the company’s China operations does not yet provide reason for us to raise our current forecasts.
Drag the trend-line in the chart below to assess the impact of various handbag revenue per Coach store trends on the company’s stock value.
Our complete analysis of Coach’s stock is here.
Notes: