Coach (NYSE:COH), a leading American marketer of luxury handbags and other fashion accessories, continues to struggle in the women’s handbag and accessories market. Weak demand for its products, due to rising competition from brands such as Michael Kors and Tory Burch, has forced the company into some introspection. Both these companies have taken sizable marketshare from Coach and its stock has fallen 35% over the past year-and-a-half, as sales have flatlined. In response, the company’s management has laid out a four-pillared strategy to regain its market share. In this article, we analyze the effect this transformational strategy will have on our $59.5 price estimate for Coach’s stock
First Pillar: Brand Transformation
With a new CEO and creative director in place, Coach plans to evolve beyond handbags and small leather goods, and into a full lifestyle brand for women and men. The company has begun diversifying its products to promote sales in other departments. The campaign began in March with a roll out of “shoe salons” in some of its flagship stores to enhance product presentation. This rollout was followed by increased offerings of clothing, watches, and jewelry — all designed to promote customer experience with the brand. It has also enhanced its marketing activities to spread its new brand image among customers. A big step in this direction was the remodeling of its flagship New York store.  According to the company’s management, the campaign has already generated significant buzz in the fashion press and in social media channels globally.
The conversion of this buzz into actual demand and in-store traffic hasn’t yet materialized. The in-store traffic is usually a lagging indicator, so the impact of this initiative will only be visible over time. Increased sales through the handbags, footwear and other accessories divisions could represent a significant uspide to our valuation.
Second Pillar: Geographical Expansion
Another item on the calendar for Coach this year has been global expansion. Coach hasn’t been very successful in Europe, with only 20 stores in the whole region. Despite the state of Europe’s economy, the company’s management believes it’s a big potential market for Coach: the company estimates that the global market for premium bags and accessories is $34 billion, of which Europe represents $6.5 billion. To go after those dollars, Coach plans to open 10 more stores in Europe by next spring. The company also completed the purchase of their partner’s 50% interest in their European joint venture created with Pepe Jeans.
Beyond Europe, China remains the most important single geographic opportunity for Coach. The company opened six net new locations in Mainland China bringing the total number to 132 locations, including 114 on the Mainland. China sales rose over 35% from prior year, fueled by distribution and double-digit same-store sales. The company is also present in 290 other stores spread across Japan, Taiwan, Singapore and Korea. By targeting the proliferating middle classes of emerging economies like India, Indonesia, China and Latin America, Coach can expand its international revenues significantly.
Third Pillar: Men’s Accessories
Coach also continues to drive its men’s business globally through new standalone and dual-gender stores, and by dedicating more space for a broader men’s assortment in existing retail stores. In the first quarter, Coach’s sales of men’s bags and accessories increased over 25% globally. The company is optimistic about its men’s business going forward, targeting about $700 million in sales in fiscal 2014 and growing to $1 billion in sales in three years. 
The men’s business, which grew by approximately 50% in fiscal year 2013, continues to be a long term driver for the company. We believe this business will continue to rise at a strong rate in the future and help drive both its North American and Asian sales.
Fourth Pillar: Internet Sales
In addition, Coach is also expanding its presence online to bolster its distribution outside North American borders. E-commerce sales usually have higher margins than store related sales as the former are devoid of store related expenses. Coach’s e-commerce site in China was launched only a year ago and while still in early stages, it has received orders from over 200 cities, with over 150 from cities where the company has no store presence. Similar rewards can be reaped from brand building in other emerging economies coupled with online presence. With the rapidly expanding e-commerce business, we expect an increase in Internet revenues to improve margins going forward.Notes: