The luxury goods industry broadly includes products like luxury watches, jewelries, Apparels, leather goods, cosmetics and perfumes. This industry has been witnessing an upward climb in past few years and the growth momentum is anticipated to continue. Considering the regional market, barring Russia, all other regions have recorded growth with Japan at the top of the list of this growth market. Various companies are now focusing in this segment to acquire a higher market share of the luxury goods market. Coach (COH, Financial), is one such company that have a product portfolio catering to the consumers opting for luxury goods. The company was hit badly in the stock market, but the investors who are looking for long term returns can always anticipate good returns from Coach in long run. The company is trying to strengthen the top and bottom line by expanding its network by opening new locations globally, with a prime objective of deeper penetration and to target customers with higher disposable income.
Headwinds
Brighter prospects in China: China is emerging as a hot destination for fashion and luxury goods. As per a research data provided by Mckinsey, China will contribute to around 20% of luxury goods sales in 2015. This will be revenue of around $27 billion generated by sales of luxury goods in China. Moving ahead, the consumption of luxury goods in china is destined to increase as the number of wealthy individual are growing in China and will continue to grow in next few years. At a time of rapidly rising incomes among the Chinese individuals, widely available luxury goods, and shifting attitudes toward the display of wealth, more Chinese consumers than ever feel comfortable buying luxury goods.
Coach is an established brand in China and has been performing exceptionally well in this region. The company has recorded 10% year over year growth in comparable sales. The company is further focused to increase its footprints in china and has opened two DOS (directly operated stores) in the mainland of China. The company also has plans to open 20 new stores in China, in the fiscal 2015. The company has a strong guidance of $600 million as sales revenue for the current fiscal that is anticipated to be generated from sales in China.
Journey ahead
Currently, the company does not have a deeper penetration in the European market and is now keener on expanding its footprint in the European market to influence its top and bottom line. Despite this, it has posted significant sales growth, courtesy double-digit comps growth. The luxury goods market is anticipated to reach $150 by the end of 2018, signifying a gain of $38 billion from 2013 to 2018. The company anticipates sales revenue of $100 million in this region in the current fiscal year as compared to $60 million in last fiscal year, growth of 66%. Furthermore, the company has plans to start 10 new directly operated locations and over 100 wholesales location, and expects revenue of $0.5 billion that can be generated in the longer run.
As a part of sales and brand promotion programs, the company is remodeling its stores for higher productivity. On the marketing front, Coach has increased the budget for print media advertisement, as a brand promotion activity. At the same time, it pulled back on promotional activity to twice a year and DOS flash sales from three a week last year to once a week this year.
Acquisitions for stronger product portfolio
The global footwear market is witnessing a constant growth mainly due to the ever changing trends of fashion. The footwear market has displayed a sustainable growth, courtesy rising demand for innovative designs, growing awareness of lifestyle and fashion trends, rising population and disposable income levels. In an attempt for a deeper penetration in the women’s footwear market, Coach is one of the leading contenders to acquire Stuart Weitzman that is a manufacturer of luxury women footwear. This deal is anticipated to be closed anywhere in between $600 to $700 million. If this deal takes shape in favor of Coach, then the company certainly has a stronger grip on the luxury footwear market for women.
Conclusion
The company is expanding its location for a deeper penetration that can further leverage growth. The forward P/E ratio of the company stands at around 18.24 and with this P/E it can always provide a good return in future. I would suggest a buy for this stock for investors looking for sustained long term returns.
