As the luxury retailer Coach (NYSE:COH) releases its Q1 fiscal 2013 earnings on 23rd October 2012, investors will have a keen eye on the impact of the weakening Chinese economy as well as the international expansion plans on Coach’s quarterly results.  Additionally, the performance of the men’s business will also be important because its revenues have doubled over the last year and Coach plans to add this business to one-third of its North American stores by the end of fiscal 2013.  The retailer also intends to focus on the growth of its women’s business by launching new brands and opening new stores, and it will be interesting to see its progress on this front.  Overall we expect moderate to healthy growth in Coach’s revenues driven by international expansion, and opening of new stores and success of the men’s business in North America.
International Operations’ Results Will Be Affected By Chinese Economy and Coach’s Acquisitions
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Asia is a rapidly growing market for luxury retailers, and Coach is planning to expand its foothold by creating greater brand awareness and by expanding in the biggest markets such as China and Japan. Coach plans to open 30 stores in China and 13 stores in Japan in fiscal 2013.  Although annual consumer spending in China has been increasing for the last three years, the GDP growth rate was the lowest in Q3 2012 since 2010.   This suggests weakness in quarterly consumer spending which can potentially slow down Coach’s comparable store sales growth.
It must be noted that Coach acquired certain retail businesses in Malaysia and Korea in the beginning of the first quarter of fiscal 2012 and will be including them in its upcoming results. 
North America’s Same Store Sales Growth Might Remain Low
Coach’s same store sales growth in North America has been on a downtrend, dropping from 9.2% in Q1 fiscal 2012 to 2% in Q4 fiscal 2012.  Given this trend and the fact that consumer spending has seen a slight dip in September this year, we expect the retailers same store sales growth to remain low in Q1 fiscal 2013 results.  The average U.S. consumer spending has roughly remained same for the last two quarters (calendar year) but the consumer spending for the entire month of September was lower than the average.  This can be attributed to less traffic during the entire month and cheaper product sales.
However, Coach plans to expand 20 locations in the fiscal 2013 to accommodate dedicated men’s shops, which has proved to be a lucrative business and might help the same store sales to a certain extent.  Moreover, the launch of new brands such as Hamptons, Poppy and Madison might drive additional traffic. Overall, we expect same store sales to be similar to what we saw in the last quarter. 
Additionally, the impact of sequential declines in cotton prices that is benefiting apparel companies is not as much of a tailwind for Coach.  Apparel, travel kits, jewellery & fragrance segment constitutes roughly 15% to Coach’s stock according to our estimate. Therefore, the positive lift to the margins from lower cotton prices in Q1 fiscal 2013 will be small.
Our price estimate for Coach stands at$85, implying a premium of about 50% to the market price.Notes:
- Coach’s press release [↩]
- Coach’s Q4 fiscal 2012 earnings transcript, July 31 2012 [↩] [↩] [↩] [↩] [↩] [↩]
- China Consumer Spending, trading economics [↩]
- Remembrance of things fast, The Economist, Oct 18 2012 [↩]
- Coach’s SEC filings [↩]
- U.S Consumer Spending, Ycharts, Oct 19 2012 [↩] [↩]
- Cotton Monthly Price, index mundi, Oct 18 2012 [↩]