2 Key Trends to Watch for Coach
Handbags are the most important product for Coach (NYSE:COH), generating roughly 56% of the company’s equity value by our estimates. This high dependence on one single product category could pose heightened risks. Coach, widely recognized as an ‘affordable luxury’ brand, competes with other premium apparel and accessories players like Polo Ralph Lauren’s (NYSE:RL), Liz Claiborne (NYSE:LIZ) and AnnTaylor (NYSE:ANN).
Our price estimate for Coach stock stands at $57.62, roughly 10-15% ahead of market price.
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Here we highlight 2 of the most important drivers for Coach’s business and potential upside and downside stemming from these key factors.
10% Downside – Daily Handbag Revenue per Coach Store
The average daily handbag sales per Coach-operated store have increased significantly over the past 5 years, with annual growth each year except 2009. We currently forecast that daily revenues from the sale of handbags at Coach stores will almost double over our forecast period, from a base of about $8,400 in 2010, driven by increased demand for affordable luxury and rapid international expansion.
There could be however be a 10% downside to our $57.62 price estimate if daily revenues from handbag sales at Coach stores shows slower growth to $12,000 by the end of our forecast period. The concern here would be a loss of exclusivity for the brand (a must for luxury products) due to dilution.
5% Upside – Higher Handbags EBITDA Margin
We currently forecast that Coach’s handbags EBITDA margin will drop from 35% in 2010 to 32% in 2012 as the company focuses more on its retail business, which has lower margins. There could, however, be 5% upside to our price estimate if Coach is able to keep operating costs in check and maintain EBITDA margin for its handbag business at current levels going forward.