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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 posted its second quarter earnings on January 31, 2016. Amid a challenging and volatile global retail environment, the company was able to deliver top line growth in each of its segments, highlighted by positive comparable sales in North America, and overall gross margin expansion. Despite the department store pullback, the retailer witnessed double digit growth in earnings. While the revenue was in line with the consensus expectations, the company beat the earnings per share estimates by a penny. The second quarter marked the third consecutive quarter of positive comps in North America. Coach brand sales in the region increased 2% on both a reported and constant currency basis, including a negative impact of the department store pullback. Direct sales increased 5% and the brick and mortar store comps rose approximately 4%, driven by higher ticket prices and greater conversion, with traffic down modestly. However, e-commerce negatively impacted the results, driven lower due to the company's actions to limit the promotional stance online, pushing the aggregate comps down to a positive 3%. Coach has continued to drive brand elevation, with its 1941 collection representing one-third of the handbag sales in the top tier retail stores. The penetration of the above-$400 price brackets increased to 50% of the handbag sales, a massive rise from the 30% seen last year.
- 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 $938.9 million in 2016 to $1,078.5 million by the end of our forecast period. We expect these sales to grow on account of rapid growth in China 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 2016, 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.
Trefis Forecast Rationale for Handbags EBITDA Margin
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) are profits after factoring in typical expenses, such as Cost of Goods and Services Sold, SG&A Expenses, and R&D Expenses. EBITDA Margin represents divisional EBITDA as a percentage of divisional revenues. We adjust EBITDA figures to exclude non-recurring charges and non-cash charges, such as stock-based compensation expenses.
Handbag EBITDA margin increased from 40% in 2009 to 42% in 2010 primarily as gross margins improved, driven by higher full-priced sales that increased during the year and a decrease in the SG&A expense rate as Coach leveraged its selling expense base on higher sales. The figure however again declined in 2011 to 40%. The decline was primarily due to an increase in cost of goods sold and more sales related to factory stores which carry lower margins than that of full priced stores.
In 2012, the margin reached 41% on account of improvement in gross margin and drop in SG&A expenses as % of sales.
In 2013, the margin reached ~42% on account of a higher average unit prices. The company has been focusing on trying to increase the percentage of $400 and above handbags in its sales mix. Furthermore, the company is planning to cut down on flash sales and discounts.
We expect margin to decline in the short term as acquisition of distributor businesses in international markets will increase the SG&A expenses. Thereon, we expect margin to gradually increase.
Trefis considered the following factors for its forecast:
- Increase in sales of full priced merchandise with improvement in macro-economic conditions
- Coach shifted its strategy to factory stores in the wake of global macro-economic weakness in 2011. As the economic situation improves, we expect Coach to get most of their revenue from retail stores and e-commerce.
- With the gradually improving macro-economic conditions and steadily rising consumer confidence, we expect the sales of full priced merchandise to increase in the U.S.
- As full priced merchandise carry higher margins than that of factory stores, this factor will positively impact the margins.
- Increasing contribution from e-commerce sales
- E-commerce sales usually have higher margins than store related sales as the former are devoid of store related expenses.
- With the rapidly expanding e-commerce business, we expect an increase in internet revenues to improve margins going forward.
- Fewer Discounts
- Coach has reduced the frequency of online flash sales significantly. Earlier, the company organized these sales twice a week but now these happen only twice a month.
- Higher Average Unit Prices
- Coach is increasing the average unit prices of its products. The company is trying to increase the contribution of $400 and above priced handbags in its sales mix.
- Decrease in operating expenses
- We believe Coach will be able to cut down its operating expenses as efficiencies of scale are established. Greater control over the business, as the percentage share of Coach store sales increases will allow Coach to allocate fixed portion of SG&A expenses to a larger sales base.
- We believe Coach will be able to cut down its advertising and marketing expenses in the future by further promoting its direct marketing efforts.
Back to Company Overview
- Increased competition in the handbag market
- The competition in the handbags market has intensified as upcoming companies such as Michael Kors and Kate Spade have gained traction in the market.
- We feel Coach may have to keep its handbag prices in check in the future on account of competition from these players.
How Does Trefis Modelling Work?
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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