Coach (COH)'s results were a bit more than disappointing. I have been bullish on the name since the year started and I was sure the stock's weaknesses were more than reflected by its relatively conservative valuation. I was dead wrong. The stock is down by 3% year-to-date, under-performing the S&P 500 by more than 20%. Despite being able to show strong results in the international side of its business, the company's inability to turn around its North American operations is indeed worrisome. Let's take a look at the company's results.
A Disappointing Quarter
North America same-store-sales (maybe the most relevant metric in the retail business) were down by 6.8% year-over-year, after being down by 1.7% in the previous quarter. Even when it's true that demand conditions in the region were challenging for the whole sector during the quarter, the company has largely under-performed its peers. The reason can be found in the following fact: Coach has clearly under-invested in its brand for a couple of years. The results of management's negligence are way worse than what I had expected.
All of the above being said, and as I mentioned before, Coach's international growth remains strong in the huge Chinese market where same-store-sales were up double digits and overall sales came up strongly by over 35% year over year. In addition, despite the sales shortfall, earnings were in-line with consensus as gross margin was in line with market expectations at 71.8% and SG&A was much lower than anticipated.
On the other hand, Coach's valuation against peers remains compelling. Coach, which is being held by Steve Mandel and Dodge & Cox, trades at a fraction of what its peers sell for. The company, which is net debt free, is now selling for 2014 8.8 times EV/EBITDA and 15.8 times earnings. Companies such as the French luxury conglomerate LVMH Moet Hennessy Louis Vuitton (LVMUY) [size=11.0pt;line-height:115%; font-family:"Calibri","sans-serif";mso-ascii-theme-font:minor-latin;mso-fareast-font-family: Calibri;mso-fareast-theme-font:minor-latin;mso-hansi-theme-font:minor-latin; mso-bidi-font-family:"Times New Roman";mso-bidi-theme-font:minor-bidi; mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:AR-SA">— — Ralph Lauren[/b] (RL), sell for 2014 9.6 and 9.8 times EV/EBITDA , respectively.
The picture is worrisome and results are way worse than I had expected at the beginning of the year but, at the same time, the company's management is focused on delivering solutions and Coach still trades at a significant discount to peers.
Initiatives to rehabilitate the North American woman’s business are starting to gain traction. Even when efforts to increase penetration of non-accessory products could possibly dilute margins, I believe they may also help reinvigorate the brand. On top of this, the recent hiring of a new design director, the continued reinvestment in department store merchandising and the introduction of “capsule” collections that are inter-related across footwear, accessories and handbags seem to be steps towards a final solution.
We shall have to wait to see if the company can reverse the ugly trend that we have been watching for over a year now. I will stay long the shares. On the meantime, I can enjoy Coach's above than average 2.5% cash dividend yield added to its $700 million share repurchase plan of 2004.