Handbags Aside, Accessories Worth ~30% of Coach’s Stock Value
Accessories like belts, wallets, wristlets & other items are the second biggest contributors behind handbags for Coach Inc. (NYSE:COH) and represent around 30% of the firm’s estimated equity value. These two divisions make up just under 90% of the stock value by our estimates and help differentiate the company from other retailers like Abercrombie & Fitch (NYSE:ANF), American Eagle (NYSE:AEO), AnnTaylor(NYSE:ANN) and Gap (NYSE:GPS). Below we take a quick look at the outlook for the two main drivers to our accessories forecast: daily revenue per Coach store and EBITDA margin.
Belts, Wallets, Wristlets & Others at a Glance
Coach sells belts, leather wallets, wristlets and other small leather goods for women and men under the Coach brand. Women’s small leather goods, which coordinate with Coach handbags, include money pieces, wristlets, and cosmetic cases. Men’s small leather goods consist primarily of wallets and card cases.
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Novelty accessories include time management and electronic accessories. Key fobs and charms are also included in this category.
The key drivers of profitability for Coach:
1. Belts, Wallets, Wristlets & Others: Daily Revenue per Coach Store
Daily Belts, Wallets, Wristlets & Others Revenue per Coach Store increased from $2,980 in 2005 to $3,920 in 2010 at an annual growth rate of 5.6%, except the decline in 2009, as the luxury sales grew during the period and Coach launched new and innovative products within this division
We forecast Daily Belts, Wallets, Wristlets & Others Revenue per Coach Store will grow at a high rate going forward reaching $8 K by the end of the Trefis forecast period.
2. Belts, Wallets, Wristlets & Others: EBITDA Margin
Belts, Wallets, Wristlets & Others’ EBITDA Margin has historically been ~40% for Coach. However, it declined sharply since 2007 reaching 33.4% in 2009, attributable to the following factors: increase in promotional activities in Coach-operated North American stores and sharper pricing initiatives, reducing retail prices, in response to consumers’ reluctance to spend in a recessionary environment as well as increase in selling expenses as number of Coach operated stores in North America, Japan and China increased.
Belts, Wallets, Wristlets & Others EBITDA Margin jumped back in 2010 to 35% primarily as gross margin improved driven by higher full-priced sales and a decrease in SGA expense rate as Coach leveraged its selling expense base on higher sales.
We expect Belts, Wallets, Wristlets & Others EBITDA Margin to drop in the next couple of years and then remain constant for the rest of the Trefis forecast period.
Our price estimate for Coach’s stock stands at $57.49, which is about 10% below the market price though if sales and profit margins improve beyond our forecast, there could be upside to these forecasts. You can see these by modifying the charts above.