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Here’s Why Investors Should Not Buy Coach On The Dip
Posted by: kcpl (IP Logged)
Date: May 25, 2014 09:08PM

Customers have more options with increasing competition in the luxury market space. Although Coach (COH) might be manufacturing great luxury items, but customers no longer seem charmed by its products. Let’s analyze the attractiveness of its stock for investors as compared to other luxury item retailers like Michael Kors (KORS) or Fifth & Pacific’s (FNP) Kate Spade.

Coach is lagging behind

Three months back Coach did not have an awesome start to fiscal 2014. Coach informed in November that its customers planned to spend 4% less during the holiday season in 2013, and this is warning signal for Coach Investors need to be addressed. According to a report by Cowen analyst Faye Landes, for handbags category, women preferred Kors more than Coach versus the same period in fiscal 2013.

According to Cowen Consumer Tracking Survey, 39% of women age 18 to 34 preferred Coach over Michael Kors for handbags in December 2013, a decrease of42% in November 2013 and 46% in December 2012. Similarly, for women who purchased three or more handbags a year, preference for Coach was 41% in December, down from 50% in December 2012. These data indicates that consumer preference for Coach in the two key consumer groups is declining in the all important North American market.

This resulted in the North American same store sales, or comps to decline 13.6% versus the year ago quarter, almost twice of what analyst had expected. The declining comps led to revenue decline by 6% to $1.4 billion from $1.5 billion a year ago. The consolidated revenue in constant currency terms declined 3%. Earnings per share for the fourth quarter fell to $1.06 per share, down from $1.23 the year before.

Silver linings

However, it’s not all gloomy scenario for Coach Investors. International sales, which comprised of about 30% of revenue, increased 2%, or 11% on constant currency basis, to $425 million from $418 million last year. China gained 25% and became the strongest growth driver on the back of double-digit comps growth. Further, sales in directly operated locations in Asia, Japan, and Europe, increased sharply as well. Another strategic area of growth for Coach is the men's business which also continues to grow, with men’s bags and accessories registering nearly 20% growth globally.

Moving ahead, Coach aims at moving beyond handbags into a broader lifestyle brand that includes clothes and accessories. The company also plans a comprehensive work on women’s assortment across bags, accessories, and lifestyle categories since being the weakest link. These efforts are still in the early stages, and one must wait for a few quarters to see how this pans out. Moreover, it is doing pretty well in China, which accounts for a third of global luxury sales and this can be expected to become a good growth driver going forward.

Kors and Fifth & Pacific are in better positions

However, the new research from Departures magazine and Ledbury Research illustrates that North America is the most important market for growth over the next five years. East Asia ranked second, followed by Western Europe, Eastern Europe, and then Central and South America. This research finding is based on wealth numbers and according to Credit Suisse, the U.S. created 94% of the new millionaires in the world over the past year.

Kors comps gained 21% year over year as against the decline of Coach’s North American comps in the same region in the second quarter. A strong comps growth was registered in all geographies across all segments. For example, retail net sales grew 47% over the prior period and global comparative store sales increased 23%, representing the 30th quarter of consecutive comp store growth.

Fifth & Pacific’s handbag brand, Kate Spade, is also performing quite well. It registered a 27% increase in its direct-to-consumer (e-commerce) sales while overall sales from the brand increased 65% in its second quarter. A new handbag line was launched by the company its specialty stores in the third quarter, and that business is booming as per management. This new line is also doing well in the wholesale channel. However, out of the two (Lucky and Juicy ) of the four brands -- Juicy Couture, Lucky Brand, Kate Spade and Adelington Design Group have been already sold off, the valuation is very expensive to be tempting.

Takeaway

Coach declined almost 40% from its peak in 2012 and is trading at the levels of 2010. Currently it trades at 13 times earnings. The company has an yield of 2.6%, and seems like a low-risk-bet with significant upside if its plans work well and the company bounces back. However, there is a huge competition from the likes of Kors which is a big negative that investors should be aware.



Stocks Discussed: COH, KORS, FNP,
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