Coach (NYSE:COH) is a leading American retailer of luxury lifestyle handbags and accessories. Handbags sales are the largest source of revenue for Coach, generating more than half the company’s revenues. We estimate that the handbags division is the most valuable division for Coach, constituting 56% of the $40 Trefis price estimate for Coach’s stock.
We believe Coach’s revenue from handbags will increase over our forecast period due to increasing demand for handbags in emerging markets and Coach’s strategic positioning as an “affordable luxury player.”
However, there is a growing market of knockoff (fake) products in emerging markets like China and competition from these low priced substitutes could hamper Coach’s handbag sales. This could lead to a 17% downside to Trefis price estimate of $40 Trefis price estimate for Coach’s stock.
Coach Handbag Revenue Expected to Double
We estimate that Coach’s handbag revenues will double over time as the average per store revenue that Coach earns each day from selling handbags will increase from an estimated $7,800 in 2010 to about $13,300 by the end of the Trefis forecast period.
The average Coach handbag costs in the range of $275 to $325, implying that Coach sells 24 to 28 handbags each day per store, and that this will increase to 41 to 48 handbags based on our forecast (at constant prices).
This increase will be driven by the following factors:
1. Increasing demand for handbags in emerging markets
With rising living standards in emerging markets like China, people are becoming more fashion conscious and are spending more on lifestyle products. China is already the fastest growing market for luxury handbags and fine accessories in the world, and is projected to become the largest market by 2013.
With Coach eying rapid expansion in China in the coming years, we believe the projected increase in handbag sales will be driven primarily by the growth in demand in the Chinese market.
2. Strategic positioning of Coach brand
Coach has successfully avoided direct competition with “aspirational” luxury brands like Louis Vuitton and Gucci, and “absolute” luxury brands like Hermes and Loro Piana by establishing itself as an “affordable” luxury player.
This has helped Coach target a wider range of consumers, as opposed to other luxury brands which remain exclusive to high-end consumers. This strategy has helped Coach to withstand pressures during the recessionary period as consumers looked for value, while other luxury brands, including Louis Vuitton and Hermes, reported slowing sales.
Even as the economy improves and consumer spending increases in the future, consumers continue to remain value conscious. The luxury market has been hit by a renewed sense of consumer ethics, which has seen some consumers turning away from the luxurious outlook to a “less is more” approach.
Potential Downside of 17% to Trefis Estimate from Knockoff Products
Coach’s revenues from handbag sales may not observe the projected growth due to the impact of knockoff products.
China is a big market for knockoff luxury products. These products are available at prices as low as 20% of branded products and could adversely affect the sales of branded luxury goods. Since Coach targets value-conscious consumers, this makes the company more vulnerable to the impact of knockoff products compared to high-end luxury brands which are losing fewer potential customers to knockoffs.
If Coach’s handbag revenues per store were to remain flat rather than increase as we forecast, there would be a $7 (17%) downside to the $40 Trefis price estimate for Coach’s stock.
