Here’s What Matters For Coach’s $66 Valuation
Coach Inc. (NYSE:COH) is a leading American marketer of luxury handbags and other fashion accessories. While the company has historically achieved high top line growth, with an average y-o-y sales growth of 13.4% during the four quarters through Q1 2013, its growth rate slipped in Q2 2013. In Q2 2013, Coach registered only a 4% annual rise in sales with its North American sales increasing by a mere 1%. Its net margin also declined by 50 basis points annually to 23.5% in Q2. Coach’s stock price has declined by almost 20% since its last quarterly results were announced. (Read: Coach Quarterly Results Disappoint Due To Weak N. American Performance)
In this article, we provide a quick overview of the major product categories of Coach, its geographical presence and the key growth strategies and risks that impact its valuation.
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What are the major product categories for Coach?
Coach’s product portfolio consists of distinct categories including handbags, belts, leather wallets, wristlets and other small leather goods (such as cosmetic cases, wallets and card cases), apparel, travel bags, jewelry and fragrance. Footwear, eye wear and watches are also sold under a licensing relationship by other companies.
Handbags represent the most dominant product category for Coach and account for around 65% of the company’s revenues and contribute around 60% to our price estimate for Coach. Belts, wallets, wristlets and other small leather goods represent the second biggest category accounting for around 28% of Coach’s sales. The other products including apparel, travel bags, jewelry & fragrance, footwear, etc. account for around 7% of Coach’s sales.
What are the major geographical regions for Coach?
Coach operates in North America as well as in international markets. Through its North American segment, Coach sells products through Coach-operated stores (including e-commerce sales) and wholesale distributors. The North American segment accounts for around two-thirds of its total sales. The international segment represents sales through Coach operated stores in Japan (including internet sales), mainland China, Hong Kong and Macau, Taiwan, Singapore, Korea, Malaysia, as well as sales to wholesale distributors in more than 20 countries.
What is the growth strategy for Coach?
The major growth strategy for Coach includes growing its international operations and focusing on men’s business and digital world to enhance its revenues.
Expanding international operations
International sales contribute approximately one-third to Coach’s total sales. Coach is aggressively expanding its international operations by opening new stores in countries such as China, Japan, Singapore, Taiwan, Malaysia and Korea. China is positioned as the biggest growth opportunity for Coach and it is witnessing high growth from the region. Chinese sales were up by 40% annually in Q2 2013. Coach aims to open 30 new stores in China during fiscal 2013 and it recently opened an e-commerce site in the country to further drive its sales.
Coach also aims to expand in the regions of Europe, Latin America (including Brazil, Venezuela, Columbia, Panama, Chile and Peru), other Asia Pacific countries (Australia, Thailand and Indonesia) and in the Middle East by growing its distributor business in these regions. We feel that the international expansion strategy will help bolster Coach’s sales as the company will be able to leverage its strong brand image in the growing luxury market in Asia.
Focus on men’s business
Growing its men’s business is another priority for Coach. Coach is opening various dedicated men’s stores in addition to dual gender stores to pursue this strategy. Coach’s revenues from men’s business doubled in fiscal 2012 compared to the previous year. Moreover, the company recently reported that it expects to achieve 50% growth in its men’s business in 2013. As the men’s luxury business is prominent in Asian markets, this strategy will also allow Coach to enhance its revenues from international markets.
Bolstering e-commerce sales
With growing Internet usage and the increasing adoption of smartphones globally, Coach is also focusing on growing its revenues from the Internet and mobile channel. The company aims to leverage coach.com, other global e-commerce sites, marketing sites, third-party flash sites and social networking as part of this strategy.
What are the major risks faced by the company?
Within the North American market, Coach is facing intense competition from smaller players such as Michael Kors, Kate Spade and Tory Burch. In its latest quarter, Coach’s North American sales registered a 2% comparable store sales decline. While its competitors resorted to promotional activity during the holiday season, Coach refrained from offering such discounts to protect its brand image. However, this led to a decline in its market share in the handbags market. [1] We feel that Coach will continue to face intense competition from these smaller companies in the future, which can negatively impact its sales.
Coach’s Japanese operations reported a 2% decline in the latest quarter (in constant currency terms). We feel that this may indicate weakening demand within the region for Coach’s products. In terms of dollar sales, sales in Japan marked a 7% annual decrease. The weakened yen affected total Coach’s sales growth by 1%. This represents a headwind for Coach as continued weakening of yen may affect its sales growth in the future.
Coach is relying on continued growth from China to further drive its revenues. However, if the growth rate of the Chinese economy continues to slow down, it can hamper Coach’s sales within the region. Demand for luxury products is correlated to macroeconomic factors, such as consumer confidence and spending levels and uncertainty in economic conditions can negatively impact Coach’s sales.
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Notes:- UDPATE: Coach North American Sales Weaken As It Protects Brand, NASDAQ, January 23, 2013 [↩]