Coach Inc (NYSE:COH) is a leading American marketer of luxury handbags and other fashion accessories and will report its Q3 2013 results on April 23. North American results will be a key focus of these earnings as the company reported a mere 1% annual sales growth for the region last quarter. Investors were spooked by the weaker sales due to growing competition, and this led to around a 15% drop in Coach’s stock following the earnings release in January.
International expansion and the growth in its men’s business are the key growth drivers for Coach, and this will be a highlight in its release. However, a weaker yen could negatively impact Coach’s Asia results to a small extent. The company is also looking to broaden its brand appeal by launching more lifestyle oriented products, and we believe this move could take some time to show up in results.
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North American Sales Will Be Closely Tracked
In Q2 2013, Coach reported weak performance in the North American market, which accounts for around two-third of its revenues. Its sales in the region grew at 1% along with a 2% drop in comparable stores sales. Uncertainty surrounding the fiscal cliff, Hurricane Sandy as well as increased competition and promotional activities were all cited as key reasons for this weak performance.
Since many of the above mentioned macro headwinds were not present in Q3, the upcoming results will allow us to better gauge the changing demand for Coach’s products amid rising competition from rising brands such as Michael Kors and Kate Spade.
Coach is also emphasizing a shift in focus from an accessories brand to a lifestyle brand to reinvigorate its appeal to customers and reengage women customers with new products. As part of this strategy, Coach will enhance its portfolio of footwear, apparel, outerwear, watches and jewelry. Footwear was relaunched in a number of stores starting in March so we should see these results in the coming quarters. The company is also altering the retail presentation at its stores and broadening its marketing efforts to portray this new brand expression. While the new strategy is encouraging, we believe it could take some time for Coach’s efforts to translate to into faster growth, and we will look for updates on this.
Growing International Sales Is A Key Growth Driver
While Coach’s growth in North America has weakened, its international sales are growing rapidly. Accounting for around one-third of total sales, international sales grew by 12% annually in Q2 2013, on account of strong growth in the Chinese market. Chinese sales were up by 40% annually in Q2 2013, due to increased distribution and double-digit same store sales growth. Coach expects sales in China to reach $400 million in fiscal 2013, as compared to $300 million in the previous year.  Its sales in the countries of Singapore, Taiwan, Malaysia and Korea have also grown rapidly in the recent past.
However, Japan has proved to be an exception in Coach’s international growth. In Q2 2013, Japanese sales posted an annual decline of 2% in constant currency and 7% in dollar terms. With the yen depreciating against the dollar during January-March, we expect it to be a headwind for Coach in Q3 2013.
Coach is opening new stores in Asia and growing its distributor network in Europe, Latin America, other Asia-Pacific countries (Australia, Thailand and Indonesia) and in the Middle East. On account of these factors, we believe Coach’s international sales will continue to grow rapidly and will represent a larger proportion of the overall revenues in the long run.
Men’s Business Is Growing Rapidly
While Coach’s popularity with women customers has faced heightened competition, the growing men’s business represents an encouraging segment for Coach. The sales from its men’s business doubled y-o-y in fiscal 2012, and is further expected to grow by 50% in fiscal 2013, to more than $600 million. 
We believe Coach’s emphasis on its men’s business could augur well for its long run outlook as it can help drive sales and improve the profitability of its North American stores. We believe it could also do well in Asia where men’s spending on luxury goods is a large proportion of the total luxury market. 
Our $66 price estimate for Coach’s stock, represents around 30% upside to the market price.Notes:
- Coach’s CEO Presents at Bank of America Merrill Lynch Consumer & Retail Conference (Transcript), Seeking Alpha, March 12, 2013 [↩]
- Coach’s CEO Discusses F2Q13 Results – Earnings Call Transcript, Seeking Alpha, January 23, 2012 [↩]
- China’s Men Lift the Luxury Market, Fashionbi, February 13, 2013 [↩]