Coach Positioned to Gain from Increased Spending in Men’s Luxury Segment

Coach (NYSE:COH) is a leading American marketer of luxury lifestyle handbags and other fashion accessories for both men and women. It is one of the most well-known accessories brands in the US and also maintains a presence in select international markets. Coach competes with other premium apparel and accessories players like Polo Ralph Lauren (NYSE:RL), Liz Claiborne (NYSE:LIZ), and AnnTaylor (NYSE:ANN), as well as high-end brands like Louis Vuitton, Hermes, Gucci and Prada.

Coach’s product offerings have traditionally targeted the women’s luxury segment. However the company has expanded its product lines over the past few years as the market for men’s luxury accessories has grown. During fiscal Q1 2011 (ended October 2, 2010), Coach opened its first 5 factory stores for men.

Breakdown of Coach’s Value by Product Line

Handbags remain Coach’s main driver of sales, while the majority of its men’s products are either leather goods (Belts, Wallets, Wristlets & Others), footwear or watches (Footwear, Eyewear & Watches). Notably, since 2005, handbags as a percentage of total sales dropped from 65% to 62%, while sales of accessories like belts, wallets and wristlets increased from 28% to 29% – small changes, but potential indicators of a growing trend.

We estimate that Coach’s accessories business (belts, wallets, wristlets, etc.) constitutes 29% of the $55.08 Trefis price estimate for Coach’s stock which is about 5% above market price. Handbags is still the most valuable division for Coach, generating 57% of the company value.

We’ve previously discussed Coach’s growth potential from men’s accessories sales (See Rise in Demand for Men’s Luxury to Boost Coach’s Accessories Sales). Although these operations are still in early stages, initial trends indicate that this potential could be taking shape.

Coach Positioned to Gain from Increasing Sales of Men’s Luxury Accessories

Men’s accessories currently contribute only about 3% to 4% of Coach’s total sales, although this number will likely increase in the coming years.

With a sharp rise in consumer spending during the holiday season, one particular trend struck us. Spending on men’s clothing increased by 10.5% over last year while women’s clothing spending was up only 5.6%. The sharp rise in men’s goods sales will be a positive for Coach as it expands these operations. To top it off, luxury sales seem to be picking up the pace as well – spending on luxury items increased by 6.7% over last year. ^[1]

These results suggest that consumer appetite for luxury spending is gaining momentum, and Coach is well-positioned for upside in the current market. Despite eleveated U.S. unemployment levels, several high-end retailers like Coach and Ralph Lauren have rallied. ^[2] While consumers are now showing an appetite to release pent-up luxury demand that mounted during the recession, discretionary budgets will likely remain constrained. This is where Coach’s image as “affordable luxury” comes into play and positions the company to capture share of the recent luxury demand.

A pickup in men’s spending could generate upside beyond our base forecasts within Coach’s belts, wallets, wristlets, & other product segment. However, as Coach’s profitability will continue to be driven by handbag sales, the potential upside to the company’s stock value from growth in accessories sales is limited. Our price estimate, at $55.08, already stands 5% ahead of market price.

To see the impact that various trends in spending on belts, wallets, wristlets and other accessories could have on Coach’s stock value, drag the trend line in the modifiable chart above.

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Our complete analysis of Coach’s stock is here.

1. Resilient Shoppers Ring In Cheer For Retailers, Wall Street Journal [↩]
2. More Gains for Coach Could Be in the Bag, Barron’s [↩]