Coach Looks Fully Valued As Modest Growth Outlook Is Priced In

by Trefis Team
+19.00%
Upside
50.00
Market
59.50
Trefis
COH
Coach
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    Quick Take
  • Coach’s stock price has jumped by more than 15% after the release of its latest quarterly earnings.
  • We estimate Coach’s total sales to grow at 6-7% over our forecast period led by rapid sales growth in China and other countries (except Japan) coupled with single-digit growth in North America.
  • Coach looks fully valued based on our expected growth rates for its key businesses. Coach’s profits are also estimated to decline in the short term on account of increased SG&A expenses due to the acquisition of distributor businesses in the international markets.

Coach Inc (NYSE:COH) is a leading American marketer of luxury handbags and other fashion accessories. Its stock price has appreciated by more than 15% since it released its latest earnings report on April 23. Investors were encouraged by the company’s better-than-expected performance in the North American market, where sales rose by 7% annually with a 1% increase in comparable store sales. This follows last quarter’s earnings that showed a slight decline in its largest market, and so the return to growth was an encouraging sign.

Our $60 price estimate for Coach’s stock is in line with the market price. While we have been constructive on Coach’s prospects as outlined in our article Why We Remain Bullish On Coach’s Outlook, we now believe that Coach is fairly valued as the market price incorporates most of the growth drivers present in Coach’s business.

In this article, we look at the rationale behind our top-line and bottom-line forecasts for Coach’s business. Readers can modify these estimates and see the impact on Coach’s valuation.

See our complete analysis for Coach

Total Sales Are Estimated To Grow At Around 6-7% Annually During Our Forecast Horizon

CY 2013

CY 2014 CY 2015 CY 2016 CY 2017 CY 2018

CY 2019

Total Sales ($ mil)

5,274

5,687 6096 6,502 6,898 7,275

7,678

Annual Growth in Total Sales

7.0%

7.8% 7.2% 6.7% 6.1% 5.5%

5.5%

North American Sales ($ mil)

3,696

3,929 4,146 4,343 4,523 4,681

4,835

Annual Growth in NA sales

7.5%

6.3% 5.5% 4.8% 4.1% 3.5%

3.3%

International Sales ($ mil)

1,578

1,758 1,950 2,159 2,375 2,594

2,843

Annual Growth in International Sales

5.8%

11.4% 11.0% 10.7% 10.0% 9.2%

9.6%

Our 6-7% annual growth forecast for Coach’s total sales is based on strong growth in international markets coupled with continued single-digit sales growth in North America.

Rationale for North American Forecasts

We estimate North American sales growth to be around 5-7% over the next three years and then decelerate over our forecast horizon.

These are the primary factors that drive our forecast:

  • Comparable stores sales are estimated to grow at 1-2% during our forecast period. While competition from Michael Kors and other upcoming fashion companies remains intense, we think Coach’s strategy to transform its brand image could yield results.
  • Coach is reinvigorating its brand appeal by bolstering its portfolio of footwear, apparel, outwear, jewelry, etc., and we expect sales in these product categories to grow at a strong pace in North America.
  • Wholesale sales in North America could stabilize in the future with the launch of innovative products and entry into new product categories.
  • Coach’s square footage in North America will grow in the future. We estimate the number of Coach stores in North America to rise from 545 in 2012 to 637 in 2019.
  • The factors that could prove our estimates to be wrong include intense competition from Michael Kors and slower than expected industry growth in the U.S. If Michael Kors is able to grab market share from Coach, it may result in slower growth for Coach.

Rationale for International Forecasts

% Contribution in International Sales (2012) Trefis estimate

CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018

CY 2019

Estimated Annual Growth in Japanese Sales

62%

-7% 2% 1.5% 1.5% 1.5% 1.5%

1.5%

Estimated   Annual Growth in Chinese Sales

24%

30% 25% 23% 20% 17% 15%

15%

Estimated Annual Growth in Other Countries’ Sales

14%

20% 18% 15% 15% 14% 12%

12%

Japanese Sales Will Be Impacted By Weaker Yen In The Short Term

  • We expect Japanese sales to decline in the short term on account of a weaker yen. In Q3 2013, Japanese sales were in line with the prior year in terms of constant currency; however, in terms of dollar sales they declined by 14%.
  • Over the long run, Japanese sales are forecast to grow slowly as the luxury market is mature in the region. Higher sales will be driven by expansion in square footage coupled with growth in the men’s business.

Growing Chinese Sales Represent A Key Growth Driver For Coach

  • Chinese sales grew by 40% in the second and third quarters of fiscal 2013. Going forward, we expect Chinese sales to grow rapidly; however, the growth rate could drop on account of difficult y-o-y comparisons.
  • Coach is expanding its presence in China, and this will lead to higher sales in the coming years. Moreover, the Chinese luxury market is witnessing high demand due to a growing middle class and rising economic prosperity.
  • The demand for luxury products is correlated to economic growth, and hence if the growth pace in the Chinese economy weakens in the future, it could affect Coach’s sales in the region.

Sales In Other Countries Are Expected To Rise At A Rapid Pace

  • Coach’s sales in Korea, Taiwan, Malaysia, and Singapore could post strong growth in the future.
  • Coach aims to expand in Latin America, other Asia-Pacific countries (Australia, Thailand and Indonesia) and in the Middle East by expanding its distributor networks in these regions.
  • Coach will assume direct control of its European joint venture by July 2013. We expect Coach to benefit from this strategy given its strong track record in directly running its businesses in the international markets. Moreover, the high demand from Chinese shoppers in the European luxury market will also positively impact Coach’s sales.

Margin Will Be Under Pressure In The Short Term

CY 2012

CY 2013 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018

CY 2019

EBITDA Margin (Trefis estimate)

41%

40.2% 40% 40.2% 40.4% 40.6% 40.8%

41.0%

We expect Coach’s EBITDA margin to come down in the short term on account of an increase in SG&A expenses due to the acquisition of distributor businesses in Europe and Asia. Intense competition in the market could also put pressure on margins in the near future. However, in the long run we expect Coach’s EBITDA margin to come back to historical levels.

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