Coach Inc (NYSE:COH) is a leading American marketer of luxury handbags and other fashion accessories. North America represents an important market for the company, accounting for around two-thirds of its sales. Investors are keenly tracking its North American performance, which has been the main driver behind its recent stock price movement. Coach’s Q2 2013 results saw North American sales rising by only 1%, which had led to a drastic fall in its stock price. In the latest quarter, the company bounced back in North America with sales up by 7% annually in the region leading to a recovery in its share price.
Coach’s results in North America will be keenly tracked in the future and any unexpected gain or loss in Coach’s market share could lead to a drastic movement in its stock price. Coach currently accounts for around 28% of the U.S. handbags market, and with the market expected to grow at around 5%-10% in the future, the company will have to grow by at least this rate to sustain its market share. 
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- How Has Coach’s Revenue Per Square Foot Changed Over The Years?
- What Percentage Of Coach’s Stock Price Can Be Attributed To Growth?
- Why Are We Bullish On Coach?
The increasing popularity of Michael Kors, Tory Burch and Kate Spade represents a growing threat to Coach. These upcoming brands posted much higher sales growth compared to Coach in 2012. While this leads several analysts to believe Coach will lose market share in North America in the future, we think Coach’s market share could remain stable. We expect Coach’s sales in North America to grow at around 6%-7% over the next two years, which is in line with the overall industry growth rate. We believe the market share gains for other upcoming players will come at the expense of brands other than Coach.
What is the growth rate in the North American handbags and accessories market?
The growth rate in the North American handbags and accessories’ market is forecast at around 5%-10% in 2013, according to Coach’s management.  In Q1 2013, the growth in this category was estimated in the high single digits.  The expiration of the Social Security payroll tax holiday on January 1, 2013 will impact the discretionary spending of customers during the year. While this could lead to lower spending on apparel products, it could also result in customers shifting towards accessories as they offer more value for money. 
This means – Coach’s sales in North America should rise by at least 5-10% this year for the company to sustain its market share in the North American market.
What is Coach’s market share in the North American market and what is the threat?
A leading player in the North American handbags and accessories market, Coach has various competitors including Louis Vuitton, Gucci, Longchamp, Vera Bradley, Fossil, Chanel, Guess, Marc Jacobs, Juicy Couture, etc. While Coach accounts for around 28% of the U.S. handbags market, the company is facing increasing competition from newer players, such as Michael Kors, Tory Burch and Kate Spade.  With consumers increasingly shopping for these newer brands, this has affected the sales growth of Coach in North America.
Let’s evaluate the performance of Coach against these upcoming brands, to understand whether Coach could lose or gain market share going forward.
|Michael Kors||Tory Burch (across geography)||
Kate Spade (across geography)
|North American sales growth (Jan – March 2013)||
|North American comparable store sales growth (Jan – March 2013)||
|North American sales growth (2012)||
|North American comparable store sales growth (2012)||
(Source for Tory Burch’s revenue growth figure is StreetInsider.com) 
Michael Kors, which currently has a market share of around 9% in the U.S. handbags market, looks poised to gain market share in the future as it recorded the highest sales growth (65%) in North America in 2012, among the above mentioned companies.  Tory Burch and Kate Spade also represent formidable competitors to Coach as they both achieved sales growth of around 50% in 2012.
Coach has lost some of its exclusive appeal relative to these upcoming brands as it is much more common among women customers. While Coach’s style is recognized to be more classic, these brands are targeting customers with more trendy and fashionable offerings. The presence of well known designers as founders at Michael Kors and Tory Burch also lends more appeal to these brands. However, Coach is trying to enhance its brand identity by adding more emotion into the brand with footwear, apparel and outerwear categories. Coach’s transformation strategy to move from an accessories brand to a lifestyle brand is expected to take some time to reap results in North America.
There are two possibilities going forward, depending on the way Coach’s market share trends in the future, its stock price could swing in the same direction.
Bear case scenario
- Under a bear case scenario, Coach’s North American handbags market share could continue to fall as Michael Kors, Tory Burch and Kate Spade would continue to take share. Coach’s share price would decline if the company’s sales growth falls below the overall industry growth rate in the future.
- The factors that could lead to this scenario include increased competition from upcoming brands, the entry of newer players, the inability of Coach to create a fresh appeal for its products, and Coach’s transformation strategy being unsuccessful to attract new shoppers, etc.
Bull case scenario
- We could see Coach regaining appeal leading its sales growth to outpace overall industry growth rate. The factors that could cause this include acquisition of a smaller player, transformation strategy proving successful, quality concerns at competitors improving Coach’s attractiveness, etc.
- There were reports that Coach tried to acquire Tory Burch last year, however, the move was unsuccessful.  An acquisition like this could help stimulate growth in its North America business.
- Coach’s gross margin at around 74.1% (in the most recent quarter) can allow the company to offer more promotions to enhance its top-line growth (however this has low probability).
- While Coach’s sales growth could continue to be much lower as compared to Michael Kors, Kate Spade, and Tory Burch in the future, we see no reason why Coach will not be able to grow at the same rate as the overall industry, which is expected to grow at 5-10% in the future.
- We expect Coach’s sales in North America to expand by around 6%-7% in 2013 and 2014, which is in-line with the overall industry growth rate.
- Hence, we believe the market share will mostly stay stable over the next two years. There could be a marginal decline in market share if the overall industry grows at the high-end of 5%-10% range.
- We believe the market share growth for Michael Kors, Kate Spade and Tory Burch will come at the expense of other players in the industry. Since Coach only accounts for 28% of the market, the rest of the market will be penetrated by these players to gain market share.
Our $60 price estimate for Coach’s stock, represents near 5%-10% upside to the current market price.Notes:
- Duking It Out in Women’s Handbags, Barron’s, February 23, 2013 [↩] [↩] [↩]
- Coach’s CEO Presents at Bank of America Merrill Lynch Consumer & Retail Conference (Transcript), Seeking Alpha, March 12, 2013 [↩]
- Coach’s CEO Discusses F3Q13 Results – Earnings Call Transcript, Seeking Alpha, April 23, 2013 [↩]
- Moody’s: Outlook for US Apparel Industry Changed to Stable from Positive, Moody’s, February 27, 2013 [↩]
- Tory Burch Stake Sale Suggests Michael Kors (KORS) is Overvalued, StreetInsider.com, January 3, 2013 [↩]
- Coach Approached Tory Burch About a Deal, The Wall Street Journal, May 13, 2013 [↩]