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Investment Overview for Coach (NYSE:COH)
- Strategic Plan
During the fourth quarter of fiscal year ended June 28, 2014 (Fiscal 2014), Coach announced a multi-year strategic plan to transform the brand and reinvigorate growth. This will continue till the end of Fiscal 2016, and includes:
(a) Investment in capital improvement in stores and wholesale locations,
(b) Optimization and streamlining of the organizational model, and closure of underperforming stores in North America and select International stores,
(c) Realignment of inventory levels and mix to reflect the company's elevated product strategy and consumer preferences,
(d) Investment in incremental advertising costs to elevate consumer perception, and
(e) Significant scale-back of promotional activities.
As of March 26, 2016, the Company expects to incur aggregate pre-tax charges of about $325 million, in total, under the Transformation Plan. Total life-to-date charges incurred under the Transformation Plan through March 26, 2016 were $313.3 million.
- Latest Earnings
Coach released its fiscal 2017 first quarter results on November 1, 2016, for the period ended October 1, 2016. The company's EPS was in line with estimates, but it missed out on the revenue expectation. The North American segment of the Coach brand continued its positive comparable sales growth, even though sales fell 3% in the quarter. This was a direct result of a deliberate department store pullback and a reduction in reliance on e-commerce promotions. These steps are being taken to elevate the brand positioning, which was reflected in the above-$400 price bracket rising in penetration to over 50% of the handbag sales, up from ~30% last year. This further drove the handbag AURs (Average Unit Retail) to over $300. While these efforts have resulted in a slow growth, an overall rate of 1% for the company, it has resulted in a better bottom line performance and a healthy inventory position. The company was able to reduce the inventory from $575 million in the year ago period, to $547 million at the end of the September quarter, putting it in a better position heading into the holiday selling season. The International business continued to grow strongly, with sales rising 7%, driven primarily by Europe, where sales grew at a double-digit pace, due to new distribution and positive double-digit comps.
- Stuart Weitzman Purchase
The Stuart Weitzman brand, which Coach bought in 2015, continued to bolster results, with performance in this segment surpassing expectations. The brand has managed to capture almost 8% of the net sales of the company, attaining $345 million of revenue in the financial year, with the company garnering a revenue of $4.49 billion. This brand has also started gaining recognition internationally, with substantial potential in Asia.
- Digital Strategy
Coach’s digital strategy is also beginning to yield results. The company launched its e-commerce platform in the U.K. in the second quarter and garnered over 0.5 million site visits during this period. Plans have also been made to roll it out across Europe over the next 12 months. In the U.S., Coach is gaining traction through mobile devices, which represent over one-half of the online visits.
Below is a key driver of Coach's value that present opportunities for upside or downside to the current Trefis price estimate for Coach:
- Total Handbag International Revenues: We currently forecast handbags international revenues to increase from $1,010 million in 2015 to $1,607 million by the end of our forecast period. We expect these sales to grow on account of rapid growth in the Chinese and other international markets.
For additional details, select a driver above or select a division from the interactive Trefis split for Coach at the top of the page.
Coach is a leading American marketer of luxury lifestyle handbags and other fashion accessories for both men and women. It is one of the well-known accessories brands in the U.S. with a presence in select international markets, and is widely perceived as an affordable luxury brand.
Coach's products include handbags, belts, wallets, wristlets, small leather goods, electronic accessories, business cases, travel bags, apparel, jewelry, fragrance, eye wear, footwear, and watches.
Coach, Inc. operates in three segments: North America (Coach brand), International (Coach brand), and Stuart Weitzman. The North America segment includes sales of Coach brand products to North American customers through Coach-operated stores (including the Internet) and sales to North American wholesale customers. The International segment includes sales of Coach brand products to customers through Coach-operated stores and concession shop-in-shops in Japan, mainland China, Hong Kong, Macau, Singapore, Taiwan, Malaysia, South Korea, the United Kingdom, France, Ireland, Spain, Portugal, Germany, Italy, Austria, Belgium, and the Netherlands. Additionally, International includes sales to consumers through the Internet in Japan, mainland China, the United Kingdom, and South Korea, as well as sales to wholesale customers and distributors in approximately 50 countries. The Stuart Weitzman segment includes worldwide sales generated by the Stuart Weitzman brand, primarily through department stores in North America, international distributors, and within Stuart Weitzman operated stores (including the Internet) in the United States and Europe.
We believe that Handbags is more valuable than Belts, Wallets, Wristlets & Others for Coach, due to the fact that it forms over 50% of the company's valuation. While sales in this segment fell in 2015, we expect a recovery. Coach is trying to re-brand its image in the handbag market after heavy discounting and under-investment had tainted its brand. It has dialed back on its promotional events at stores, including Coach days, and has returned to the semi-annual sales model followed by most luxury fashion brands. The number of flash sales at its e-commerce site has also been cut down to a more sustainable six or seven in a quarter. Efforts such as these and shutting down of under-performing stores are intended to have a positive impact on the top-line and improve margins, while at the same time maintaining its brand value.
The proportion of Coach's revenue from the men's segment has increased from 9% in 2012 to 16% in 2015, representing a 29% growth in revenue during the period. The company is also focusing on the Men’s opportunity for the brand, by drawing on its long heritage in the category. Coach is capitalizing on this opportunity by opening dual gender stores and broadening the men’s assortment in existing stores.
Demand for luxury goods is correlated with economic growth
Demand for luxury, fashion goods can be an indicator of flourishing economies. It is observed that during boom times, consumers with higher incomes tend to consume more high-end goods like leather handbags, designer clothes, branded watches, etc. Luxury goods are cyclical and correlate with GDP in specific regions, often exaggerating the up and down swings in the economy. As the global economy recovers, we expect the luxury goods market to return to pre-recessionary growth levels of 7-8% per year.
Increasing demand for luxury goods in China and other emerging markets
Luxury consumption in China has seen double-digit growth in recent years as a result of rapid economic growth and rising standards of living. Despite weak macroeconomic conditions globally and a threat to China's economy from surging inflation, luxury goods sales continue to grow strong in China. China is poised to become the second largest luxury market by 2019, according to Euromonitor, and the Chinese, the biggest spenders on luxury goods worldwide, now account for 30%-50% of global luxury sales, with 80% of their purchases made abroad.
Emerging markets will see the highest growth in new openings of directly-operated stores in the coming years.
Increased competition from upcoming fashion companies such as Michael Kors
Coach is facing increased competition from upcoming fashion players such as Michael Kors and Kate Spade. These new companies are increasingly gaining traction in the market. Same-store sales have been steadily eroding for Coach, while that for Kors and Kate have been rising. Coach has failed to spot numerous fashion and pricing trends over the past few years, which is why the company might be losing market share.
Transformation strategy underway
During the fourth quarter of the fiscal year ended June 28, 2014 (Fiscal 2014), Coach announced a multi-year strategic plan to transform the brand and reinvigorate growth. The steps include capital investment to improve stores and wholesale locations, streamlining and optimizing the organizational structure, closure of non-performing stores, realigning inventory levels and mix to suit consumer preferences, incremental advertisement expenses, and scale-back of promotional activities.
We expect this strategy to result in higher sales of lifestyle categories. Additionally, traffic at Coach's stores could increase due to this strategy which would also positively impact the sale of other products.
Change in bag preferences
One of the main factors attributed to slowing sales by Coach is the shift in consumer preferences from larger bags to smaller ones, which are sold at lower prices. There has also been a shift towards a preference for small or subtle logos. Coach is now moving away from loud logos due to increasing preferences among millennials of clothing and accessories without labels or logos, with such bags now accounting for just 5% of Coach’s overall handbag sales.
Consumer shift to affordable luxury
Affordable luxury brands and private labels have held up solidly during the current market conditions, while luxury and premium end companies, including Louis Vuitton and Hermes, have all reported slowing sales. The luxury market has been hit by a renewed sense of consumer ethics, which has seen some consumers turning away from luxurious lifestyles to take on a "less is more" approach.
This trend was observed even before the economic downturn, with consumers shying away from luxury items, hinting that consumers may not return to buy luxury goods in the near future and may opt for more understated choices.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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