Coach Inc (NYSE:COH), a leading American marketer of luxury handbags and other fashion accessories, posted solid financial results in Q3 2013. Its overall sales grew by 7% annually to $1.19 billion, with 7% and 6% growth in North American and international sales respectively. Excluding currency impact, the overall sales grew by 10%. Its gross margin expanded by 35 basis points annually to 74.1% in Q3 2013. However, its operating margin decreased from 30.4% in Q3 2012, to 29.3% in Q3 2013, on account of higher expenses due to acquisition of distributor businesses in Asia.
Showing confidence in its outlook, Coach announced a 13% increase in its cash dividend taking it to $1.35 per share. Investors who were previously concerned with rising competition in the North American accessories market, cheered the company’s results and took its stock price higher by 10% on Tuesday. These results tied to our previous expectations, where we remained bullish on Coach’s outlook on account of its strategic growth drivers.
We expect a healthy outlook for Coach in the long run, as it leverages its strategic initiatives of growing its men’s and international business. Further, we think the transformation of Coach’s brand image could help increase its popularity with women customers in North America.
Strong North American Results
Coach’s North American sales rose by 7% annually in Q3 2013, on the back of 8% and 1% increase in direct-to-consumer and comparable store sales respectively. The e-commerce channel continued to show excellent results for Coach in the third quarter with double-digit growth in both sales and traffic at e-commerce sites.
Coach aims to increase its popularity by re-positioning its brand image into a global lifestyle brand, anchored in accessories.  The company announced its progress against this strategic initiative during the quarter as the relaunch of footwear portfolio in more than 170 retail stores across North America gained traction in the market. The company will continue to focus on this strategy by bolstering its product portfolio and improving its store environment and marketing efforts to reflect the new brand image. The company has also added creative talent in the recent past to undertake this transformation. We believe this strategy could help add more credibility to the Coach brand, which could increase the traffic and productivity at its stores.
International Sales Continue To Grow But Weaker Yen Dampened Results
Coach’s international sales grew by 6% annually in Q3 2013. Excluding its currency impact, the sales were up by 14%. The weaker yen dampened the company’s results in the international markets in line with our previous expectations.
Chinese sales rose by 40% annually on account of increased distribution and double-digit same stores sales growth. The company has raised its revenue guidance from the Chinese region to around $425 million in the fiscal year from the previous expectation of at least $400 million.  We are encouraged by the company’s results in China as it indicates that the popularity of Coach is growing among Chinese shoppers. With the growing importance of Chinese shoppers in the global luxury market, we expect this to favorably impact Coach.
The aggregate sales of Coach from the markets of Korea, Taiwan, Malaysia, and Singapore also grew during Q3 2013. Japanese sales posted flat growth in terms of constant currency; however, in terms of dollar sales they were down by 14% in the third quarter.
In a significant announcement, Coach announced that it will buy out the 50% stake held by its partner in the European joint venture to gain direct control of the business in the U.K. and Europe. The deal is expected to get completed by July.
Given the strong track record of Coach in directly running its businesses in the international markets, we believe this strategy could help Coach in expanding its presence in the European market. The European luxury market is growing in contrast to the economic weakness being seen in the region. Chinese shoppers account for around 30% of the industry-wide luxury sales in the region and since Coach is popular with Chinese shoppers, its European sales could see a boost.
Coach also plans to grow its distributor-run businesses in the regions of Latin America, other Asia-Pacific countries (Australia, Thailand and Indonesia) and in the Middle East. On account of these efforts, we expect Coach’s sales in international markets to grow rapidly in the future. However, the continued weakening of yen could prove to be a headwind for the company.
Guidance ((Coach’s CEO Discusses F3Q13 Results – Earnings Call Transcript, Seeking Alpha, April 23, 2013))
– Sales growth in second half of fiscal 2013 to be in the high single-digit
- Fourth quarter North American comparable store sales to be in line with the prior year
- Gross margin in second half to show modest improvement as compared to the previous year
- Annual gross margin and operating margin at around 73% and 31% respectively in the fiscal year
- Effective tax rate at around 32.5% for fiscal 2013
We are in the process of estimating the price for Coach’s stock.Notes:
- Coach’s CEO Discusses F3Q13 Results – Earnings Call Transcript, Seeking Alpha, April 23, 2013 [↩] [↩]