Coach Earnings: North America Results Closely Watched Amid Competition

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COH
Coach

    Quick Take
  • Coach will report its Q4 2013 results on July 30, 2013. Its North American results will shed light on the changing competitive dynamics in the North American handbags and accessories market.
  • Coach is undergoing a transformation in its brand image, and we will track early results of this strategy.
  • Watch out for the impact of the weaker yen in the earnings as we estimate Japanese sales account for more than 50% of Coach’s international sales.

Coach Inc (NYSE:COH), a leading American marketer of luxury handbags and other fashion accessories, will report its Q4 2013 financial results on July 30, 2013. It reported 7% annual sales growth in Q3 2013 on 7% and 6% growth in North American and international sales respectively. We will be closely tracking the company’s results in the North American region this quarter to assess its ability to sustain and grow its market share amid rising competition in the North American handbags and accessories market. We will look for updates on the company’s transformation strategy to understand how it could impact Coach’s results in the future.

While Coach’s Chinese sales might continue to grow at a strong rate, a weaker yen could be a significant headwind in the latest quarter. We believe Coach’s international sales (excluding Japan) and men’s business represent its long-term growth drivers, and this could be a highlight in its release.

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Coach’s gross margin is expected to post an improvement in Q4, and its operating margin could come in lower on account of increased costs due to the acquisition of distributor businesses in international markets.

See our complete analysis for Coach

North American Results Will Be Closely Tracked

Coach’s North American results (which account for around two-third of its total sales) have been an important catalyst behind the company’s recent stock price movement. Coach’s stock had declined sharply after Q2 2013 results, wherein it reported a mere 1% growth in North American sales along with a 2% decrease in comparable stores sales. However, the stock had recovered after better results were seen in Q3, in which its North American sales rose by 7% annually.

Coach is facing increasing competition from newer fashion companies such as Michael Kors, Kate Spade and Tory Burch. On account of this, many analysts believe Coach will lose its near-30% market share in the North American handbags and accessories market in the future. [1]

The industry is expected to expand by 5%-10% in 2013, and we will be closely tracking Coach’s market share movement in the coming quarters. [2] We expect Coach to sustain its market share in the North American market over the next two years on account of sales growth, in line with the overall industry growth rate.

Impact Of Coach’s Transformation Strategy Will Be Assessed

Coach is also undertaking  a transformation of its brand image to move from an accessories brand into a global lifestyle brand anchored in accessories. [3] As part of this move, it is broadening its portfolio of footwear, apparel, outerwear, watches and jewelry. In March, the company introduced footwear in more than 170 stores of North America. Coach is also complementing this new expression of the brand with changes in retail store presentation and enhanced marketing efforts. While this strategy is expected to take some more time to yield significant results, we will be looking for updates and progress related to this move in the earnings call. We believe this strategy could lead to additional traffic and productivity at Coach’s stores in the future.

International Sales – Japanese Sales Will Be Impacted By Weaker Yen, Chinese Sales Will Continue To Drive Results

Growing international sales, particularly Chinese sales, represent a long-term growth driver for Coach. Coach’s Chinese sales grew by 40% annually over the past two quarters driven by enhanced distribution and double-digit sales growth. Coach forecasts Chinese revenues at around $425 million in fiscal 2013 compared to $300 million in fiscal 2012, and we believe Coach’s popularity with Chinese shoppers bodes well for its future growth. [3] With the increasing proportion of Chinese sales in the global luxury market, we expect this trend to benefit Coach.

Last quarter, Coach reported that it will gain direct control of its business in the U.K and Europe by buying out its partner’s stake in the European joint venture. Given Coach’s success in directly managing its operations in the international markets, we believe this move will help Coach expand its presence in the region.

Coach’s sales in other Asian markets of Korea, Taiwan, Malaysia, and Singapore is also continuing to grow at a healthy rate. In addition, Coach plans to expand its distributor-run business in Latin America, other Asia-Pacific countries (Australia, Thailand and Indonesia) and in the Middle East. On account of these efforts, we believe the proportion of international sales in Coach’s overall sales will rise in the long run.

However, Japanese sales is proving to be a headwind for Coach on account of a significantly weaker yen. In Q3 2013, Coach’s international sales grew by 14% (excluding currency impact), however, in dollar terms, it grew by 6%. Japanese sales saw flat growth (in terms of constant currency) in Q3, however, in dollar terms, they declined by 14%. We believe Japanese sales comprise for over 50% of Coach’s international sales, and hence the weaker yen will continue to impact the company’s results for the rest of 2013. We will look for more information on how Coach is tackling the currency headwinds in the earnings call.

Growing Men’s Business Represents Another Growth Driver

The men’s business represents another revenue driver for Coach. While sales in the men’s business doubled in fiscal 2012, the company expects it to increase by 50% in fiscal 2013 to over $600 million. [3] Success in the men’s business will help Coach increase productivity of its North American stores and drive its Asian sales where men’s luxury spending accounts for a larger proportion of the overall luxury market.

Our $60 price estimate for Coach’s stock, is broadly in line with the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Duking It Out in Women’s Handbags, Barron’s, February 23, 2013 []
  2. Coach’s CEO Presents at Bank of America Merrill Lynch Consumer & Retail Conference (Transcript), Seeking Alpha, March 12, 2013 []
  3. Coach’s CEO Discusses F3Q13 Results – Earnings Call Transcript, Seeking Alpha, April 23, 2013 [] [] []