Rising Inflation in China a Concern for Coach

May 12th, 2011 by Trefis Team
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Coach (NYSE:COH), 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). The firm recently reported a better-than-expected 18% increase in fiscal third-quarter profit, driven by strong growth in China.

In China, Coach’s revenues continued to increase at double-digit percentages and are expected to be about $185 million in fiscal year 2011, up significantly from around $100 million in fiscal year 2010. ((Coach’s CEO Discusses Q3 2011 Results – Earnings Call Transcript, seekingalpha.com)) However, factors like rising inflation and slowing GDP growth in China could hinder Coach’s rapid growth in China.

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We currently have a $57.49 price estimate for Coach’s stock, about 5% below market price.

High Inflation in China

In the past, rapid economic growth and rising wages have directly translated to increases in luxury retail sales in China. As a result, the country that for so long has been infamous for its thriftiness has become the world’s largest market for luxury goods. As of December 2010, sales of luxury goods in China rose to $10.7 billion, or 30% of total global sales, up from $9.4 billion in 2009, according to the World Luxury Association (WLA).

However, inflation in China hit a 32-month high of 5.4% in March and will likely continue its rise in the months ahead. On top of that, China’s economy, accustomed to double-digit growth, is only expected to grow 8-9% this year. [1]

As inflation becomes uncomfortably high this may negatively impact consumer spending, especially on discretionary luxury items.

We currently forecast strong growth in daily revenue per store from Coach’s handbag sales, driven largely by increasing demand in China. However, if sales in China see a slowdown due to rising inflation, our projections could prove optimistic.

See our full analysis of Coach stock here

Notes:
  1. China’s Economy Continues to Ascend – But Watch Out for Speed Bumps, moneymorning.com [↩]