Coach (NYSE:COH) is an American luxury accessory and clothing brand. Coach is a leading American marketer of luxury lifestyle handbags and other fashion accessories for both men and women. The company’s stock showed significant volatility in the past year, moving between a year high of ~$62 and a year low of ~$46. This movement of the stock price can be explained by the company’s slowing revenue growth, which has been somewhat mitigated by the company’s attempts at transforming its image from a luxury brand to a complete lifestyle and accessories brand. In this article, we take a look at how Coach can arrest the revenue slowdown and scale up its sales. 
The question of how quickly revenue growth rates will decline at a given company as it gets bigger, can generally be addressed by looking at the company’s specifics—the size of the overall market for its products and services, the strength of the competition, and the quality of both its products and management. We analyze how Coach fares in each of these aspects.
Size Of The Overall Market
According to a report by Global Industry Analysts, though the recent worldwide financial crisis interrupted the high growth rate in handbags market, sales are expected to gain momentum in the future. This pick up in momentum is expected to be on the back of demographic and economic growth drivers, including an increase in the women population in the age group of 15 to 34 years, a rise in demand for designer and luxury handbags, and growth in the consumer base for branded items in emerging markets of Asia. 
The handbags market in the U.S. is expected to hit a record level of $9 billion by 2015. Coach’s share of this market is 28%. A fast growing, profitable market such as this one is likely to attract new entrants, which in turn could drive down profitability. Therefore, we do not expect Coach to gain much growth from this market. 
However, there is a potential opportunity for Coach in the European and Asian markets. Despite the state of its economy, Europe is 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 exploit this potential, Coach plans to open 10 more stores in Europe by next spring. The company also completed the purchase of the remaining 50% interest from Pepe Jeans in their European joint venture. Coach could also benefit from increasing margins in China, where it hopes to expand square footage by 35% this year. The Chinese market is a huge opportunity for Coach as it is a bigger market than the U.S.
Strength of Competition
Coach faces strong competition in the luxury goods industry. The fashion industry requires consistent innovation and creativity to keep up with the capricious trends. Coach seems to be trailing its competitors in both these departments. This is also evident in the figures. Although Coach has a market share of 28%, it’s sales has only grown at an average growth rate of 9% every quarter for the past two years. Meanwhile, sales of Michael Kors have risen at a rate in excess of 50% in the same period, thereby increasing its market share to 13%. Similarly, Kate Spade and Tory Burch have also increased their market shares to 4% and 3% respectively.
That Coach is suffering because of competition is evident in its declining sales growth. During the first quarter of fiscal year 2014 Coach suffered a decline in sales growth rate of 0.9% while the industry grew at a rate of 9%. This decline in sales growth coupled with a rising inventory rate can result in shrinking gross margins and bottom line figures.
Products And Management
Given that there is not much of an upside to be gained from the luxury goods market, Coach needs to start serving new customers in order to scale up its growth. The installation of a new CEO and a creative director early last year was the first step taken by the company to bring into effect this transformation. Stuart Vevers, the new executive director at Coach, is recognized as one of the world’s leading accessories designers, and is expected to steer the company in a new direction. .
These marketing campaigns generated significant buzz in the fashion press and in social media channels globally, but this hasn’t reflected in the sales figures yet. The in-store traffic is usually a lagging indicator, so whether its strategy is working or not, will only be visible over time. Increased sales through the handbags, footwear and other accessories divisions could represent a significant upside to our $59.50 price estimate for Coach.Notes:
- Coach revenue growth rate [↩]
- US handbags market size [↩]
- Coach shares a bargain [↩]
- Stuart Vevers Coach ) For the past 15 years, Coach has stuck to its ‘house of leather’ image wants but now the company is looking forward to transform its brand. The company is moving from its core competency of handbags to head-to-toe offerings. Coach has decided to leverage its brand name and expand into the footwear, accessories, apparel, jewelry and eyewear categories. Additionally, Coach is focusing on the look and feel of its stores, and marketing to reflect a dual-gender brand. ((Coach Begins Tranformation [↩]