Coach’s Men’s Business And China Growth Buttress Our $85 Estimate

Coach Inc. (NYSE:COH) recently released its Q3 2012 earnings and reported impressive results in China and North America, registering growth of 40% and 8% respectively in these markets. ^[1] To add to that, strong comparable store sales were the added highlights of the quarter. The introduction of new brands, strong marketing and the rapid growth of Coach’s men’s business were some of the key growth catalysts.

Inspired by its performance in China, Coach is eying aggressive growth in the international market. ^[1] Moreover, the retailer is looking to further tap into the fast growing men’s segment. ^[1] Therefore, we expect the healthy growth to continue in the next quarter as well.

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Strong Product Performance And Marketing

Coach’s revenues for this quarter increased by 11% compared to the same quarter last year, mainly driven by strong comparable store sales growth in North America and China. ^[1] North America same store sales increased by 5.5% and China registered a double digit growth. ^[1]

This increase was driven by the in-store promotional services in North American factory stores, an increase in online sales and a strong performance of products such as Legacy and Madison & Poppy. ^[1] The encouraging customer response to these, and the launch of a new distribution channel for online sales in China will further aid revenue growth going forward.

Coach has also launched some innovative marketing programs such as Grand Central Takeover in New York displaying 84 Coach images for a period of four weeks. ^[1] The retailer also plans to take over telephone kiosks and buses for the advertisement during the holiday season. ^[1] Coach introduced visual merchandising elements to some of its stores during Q1 fiscal 2013 and experienced a significant increase in its sales. ^[1] Due to promising results, Coach is planning to add this enhancement to its other stores in the upcoming quarters.

Increasing Focus On Men’s Business

Three of the five stores that Coach opened in Q1 fiscal 2013 were dedicated to men’s accessories. ^[1] Furthermore, Coach added a wider variety of men’s assortments to 14 of its full priced stores during this quarter in North America, bringing the total of stores with men’s accessories in them to 100. ^[1] Even in the Japanese and Chinese markets, the retailer plans to add either dual-gender or dedicated men’s stores. ^[1] This clearly indicates Coach’s increasing focus on men’s business, which has been a critical growth driver so far.

Strong Future Expansion Plans

Coach opened 5 factory stores in North America and 8 stores in China in Q1 fiscal 2013. ^[2] It now plans to increase the total global square footage by 10% by the end of fiscal 2013. ^[1] To achieve this, the retailer is planning to add 25 stores in North America and 30 stores in China. ^[1] Moreover, as the consumer spending picks up with the economic recovery in the U.S., the retailer will leverage its strong brand recognition to drive revenue growth.

The expansion plans for China are more aggressive given the market potential and strong performance in recent quarters. Coach is looking to increase the total square footage in China by 35% by adding 30 stores in fiscal 2013. ^[1] Despite the sluggish Chinese economy, the retailer has generated healthy sales. As the economy recovers, we expect the sales to pick up further aided by the Coach’s strong geographical presence in China. Amidst a challenging environment in Japan where the sales increased only by 1%, the retailer plans a moderate addition of stores. ^[1]

Apart from the aforementioned markets, Coach is also planning to enter Europe, Latin America, Asia-Pacific and Middle-East. ^[1] Although the retailer will be entering in partnership with other companies in these regions and the number of stores to be opened is unclear, we expect that this step will still be a moderate catalyst for Coach’s stock in longer run.

Our price estimate for Coach stands at $85, implying a premium of about 45% to the market price.

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1. Coach’s Q1 fiscal 2013 earnings transcript, Oct 23 2012 [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. Coach’s SEC filings [↩]