Earnings Review: Coach Continues Its Downward Spiral

COH: Coach logo
COH
Coach

Coach (NYSE:COH), a leading American marketer of luxury handbags and other fashion accessories, posted another set of lackluster results in Q1 fiscal 2015. Coach’s sales in North America dropped by 19% for the quarter to $634 million, with a 19% fall in direct sales and a 24% fall in comparable store sales. [1]  Given the overwhelming dependence of Coach’s business on its operations in North America the significant decline in North American sales was enough to offset the gains made by Coach in its men’s, footwear and international businesses. For the quarter, international sales increased by 6% on a constant currency basis, with China sales especially growing at 10% for the quarter.  [1]  North America contributes around two-third of Coach’s sales, and the company has been losing market share to competitors like Michael Kors, Kate Spade and Tory Burch over consecutive quarters. We believe Coach will continue to struggle in the North American market in the near future due to increased competition.

We are in the process of revising our $59.50 price estimate for Coach’s stock to incorporate the changes due to the latest quarterly earnings.

Men’s Business Growing But Footwear Business Disappoints

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Over the past few quarters, Coach has changed its approach to products, stores and marketing. The company is moving from its core competency of women’s handbags to becoming a dual-gender lifestyle brand. Additionally, Coach has decided to leverage its brand name and expand into footwear, accessories, apparel, jewelry and eye wear categories. The company managed to grow its men’s business to about $700 million in annual sales in fiscal 2014. [1] This means that the men’s business now contributes about 23% to the company’s overall revenues compared to about 15% in fiscal 2013. It needs to be noted, however, that the increase in penetration is only partly due to increasing sales of products designed especially for men, a large part of the increase in contribution is due to the overall decline in the company’s revenues. According to the company’s estimates, the global spend on men’s luxury wear is about $7 billion, which represents 18% of the total spend on luxury products. The figure is expected to increase at about a 10% rate in the next five years. [2]

Additionally, Coach has been trying to increase the penetration of footwear products in its overall sales. The footwear line was relaunched in March in about 170 retail locations but its penetration over fiscal 2014 failed to increase from 12% in retail sales. [3] This is highly disappointing as the footwear segment represents a great opportunity for Coach to make up for its falling market share in the women’s handbags business and still keep its business equally profitable. Nevertheless, the company remains focused on building its market share within the highly fragmented global premium footwear category, which it estimates at about $25 billion. [3] Coach has been expanding its distribution of footwear to both international stores and wholesale outlets. It has also been trying to maximize the productivity of footwear to its overall business through a sales mix with increasing contribution of products with higher average unit prices (AUP).

North America Continues To Disappoint

Total revenues in North America fell by 19% for the quarter with a decline in same store sales of 24%. In the first quarter, Coach concentrated on the implementation of initiatives for brand transformation. These initiatives involved:

  • cutting down on promotional events- The company launched a semi-annual sales strategy towards the end of Q4 FY14, which it continued into the first few weeks of July.
  • The company had no preferred customer events in its retail stores nor any COACH days in its North America departmental stores.
  • Additionally, it reduced the frequency of flash sales from three times a week last year to just once a week this quarter. The company plans to reduce the frequency to just one or two a month by the end of this fiscal year. [2]

As a result of these moves, traffic in its stores was down year-on-year and conversion was also negative, but the average transaction price rose. For example, the company reported an increase in the penetration of >$400 handbags in its sales mix from 21% last year to 30% this quarter. [2] The company management stated that it plans to reduce square footage in its directly operated stores by about 5%, involving the closure of 70 retail stores and 50 outlet stores by the end of FY15. The reduction will be offset by a modest increase in footprint at departmental stores- the company plans to add 40 new locations this fiscal year, implying a square footage growth of 3%-4%- and the conversion of more than 300 locations from case line presentation to open sale. [2]

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Notes:
  1. Coach 8-K, SEC [] [] []
  2. Coach Q1 FY15 Earnings Call Transcript, Seeking Alpha, October 2014 [] [] [] []
  3. Coach Q4 FY14 Earnings Call Transcript, Seeking Alpha, August 2014 [] []