Rise in Luxury Spending and Demand for Pricier Handbags Should Lift Coach Stock

Coach Inc. (NYSE:COH), the leading American marketer of luxury lifestyle handbags and other fashion accessories, has reportedly witnessed an increase in sales of its fancier handbags (priced over $400) driven by a rise in luxury spending. The firm competes with with other premium apparel and accessories players like Polo Ralph Lauren (NYSE:RL), Liz Claiborne (NYSE:LIZ) and Ann (NYSE:ANN). ^[1]

We estimate that handbags are the most important product for Coach, contributing almost 57% of our $57.49 price estimate for the company’s stock. Our price estimate is roughly in line with market price.

Increased Global Consumer Confidence Boosting Luxury Sales

With the economy recoverying from the recession of 2008-09, global consumer confidence is on the rise and is positively impacting the luxury retail market so much so that many luxury goods makers now expect 2011 to be one of their strongest years in recent history.  Another reason for this optimism is the fast-growth in China, which is soon expected to become the largest luxury market in the world. ^[2]

This trend is benefiting luxury brands like Coach, as consumers are still seeking bargains and opting for affordable products over items offered by higher-end rivals. Coach in its Q3 FY11 results reported that bags over $400 accounted for about 18 percent of its sales, up from 10 percent a year earlier. The shift to fancier bags effectively raises Coach’s average bag price to about $300, from about $288 during the recession after it launched the lower-priced Poppy line. ^[1] This is likely to provide a boost to Coach’s top line resulting in an increase in daily handbag revenue per Coach store.

Higher Priced Handbags Sales Will Help Curb Margin Contraction from Rising Production Costs

A rise in sales of higher priced Coach handbags is good news for the “affordable luxury” retailer which has been facing a rise in labor costs in China and now plans to shift production to countries with lower production costs. ^[3] Higher average pricing of handbags is likely to help Coach retain its high margin, one of the highest in the apparel and accessories industry, by deleveraging rising production costs.

We currently forecast that Coach’s handbags’ EBITDA margin will decline in 2011-12 before flattening out. However, if Coach manages to maintain its margin at current levels as a result of the better mix of higher priced products, there could be upside of about 6% to our $57.49 price estimate for Coach stock.

See our full analysis of Coach stock here

1. Reuters Summit – Coach focuses on priciest bags again, Reuters [↩] [↩]
2. Luxury execs see strong 2011, more M&A, Reuters [↩]
3. Coach to shift manufacturing from China, FT.com [↩]