Growth in Addressable U.S. Market Can Lift Coach

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 U.S. 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.

In its fiscal Q2 2011 earnings release, Coach reported significant sales improvement. Coach’s direct-to-consumer sales (or sales at Coach-owned stores and website) increased 17% in North America during the quarter while Coach’s indirect sales (or sales to department stores and other third party specialty retail stores) both in US and international markets increased 28%. Coach witnessed strong growth in the retail channel with same store sales increasing 12.6% in North America. Same store sales at international department also showed double digit improvement.

Based on the strong Q2 results, we now have now updated our price estimate for Coach stock to $57.02. We estimate that Coach’s handbag business is the largest division (by value) for the company, contributing 57% of our estimated stock value.

See our full analysis and $57.02 price estimate for Coach

Addressable U.S. Handbag and Accessory Market To Be Worth $9 Billion

Coach reported a 14% rise in handbag and accessories sales in North America during Q2 2011 driven by a similar increase in the addressable U.S. handbag and accessory category. The firm forecasts that the addressable category will increase to $9 billion in fiscal 2011, surpassing its previous peak. ^[1]

We currently forecast that the daily handbag revenue per Coach store will grow from around $8K in 2010 to around $15 K by the end of our forecast period due to strong demand in international markets. However, Coach’s recent strength in North America indicates that cautious consumers in the U.S. are turning to “afforable luxury” as the economic outlook remains uncertain.

We believe Coach, already the market leader in the U.S. handbag and accessories market and widely known for its “affordable luxury” image, stands to benefit from this trend. The result presents potential upside beyond our current handbag revenue per Coach store forecasts and, accordingly, our $57.02 price estimate for Coach stock.

We have also previously examined the potential upside to Coach stemming from its expansion in China (See Could Coach Replicate its Japanese Market Success in China?)

To see the impact that various trends in daily handbag revenue per Coach store could have on Coach’s stock value, drag the trend line in the modifiable chart above.

1. Coach Q2 11 Earnings Call Transcript, Seekingalpha.com [↩]