In this article, let's take a look at Coach Inc. (COH, Financial), a $8.62 billion market cap company, that designs, makes and markets fine accessories for women and men, including handbags, weekend and travel accessories, outerwear, footwear and business cases.
Opportunity for growth
The company has two reportable segments, North America and International. Coach has closed nonperforming retail stores due to a decline in the North America business. Further, the international business is under maximum potential.
Two regions such as Japan and China are still waiting for growth. In Japan, the company has modest growth for the past 10 years (single-digit growth), but competitors have lost money.
In China, the firm has good potential for growing. It should reach higher operating margins in China due to lower operating costs.
Brand strength
Coach has a strong recognition of its brand which helps with pricing policy, sourcing and distribution. Further, the brand is important because it could offset possible future changes in tastes and preferences.
Ratings
Recently, the company was downgraded by JPMorgan (JPM, Financial) to Neutral from Overweight and and lowers its price target to $30 from $47. Coach shares have a consensus price target closer to $40. Also, Credit Suisse (CS, Financial) lowered its price target to $33 from $36 and reduced its full year 2015, 2016 and 2017 earnings per share estimates, but maintained its "neutral" rating on the stock. "We are concerned about the sharp increase in handbag styles on sale and the discount rate during the semi-annual sale period on the company's website. In our June check, 38% of styles were on sale at an average discount rate of 50%. This is an acceleration from the last semi-annual sale check in December where 15% of styles were on sale at an average discount of 33%," Credit Suisse said in an analyst note.
Yielding 4%
The stock is yielding almost 4% and is close to 10-year high. It is ranked higher than 86% of the 991 Companies in the Global Luxury Goods industry and almost doubled the industry median. This is a good reason to hold Coach in a portfolio.
EPS declined
The last quarter was not so good for the company. A decline in earnings per share while the net income decreased by 54% when compared to the same quarter one year ago. Perhaps in the first week of August the stocks beat at earnings.
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 18.5x, trading at a discount compared to an average of 22.8x for the industry. To use another metric, its price-to-book ratio of 3.39x indicates a premium versus the industry average of 1.76x while the price-to-sales ratio of 2.0x is above the industry average of 0.76x. These two ratios are close to 5-year low.
Final comment
We believe there is room for the firm to gain market share in other regions. Coach plans to open stores in key markets across the world. Asia and Europe of course are key market for the firm and we hope it could gain market share in other regions.
Despite the company's recent quarter, the next one could be a great one beating estimates and achieving better results than most retailers.
Hedge fund guru Tom Gayner (Trades, Portfolio) initiated a new position in the stock with 18,000 shares while Paul Tudor Jones (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) sold out the stock in the first quarter of 2015.
Disclosure: Omar Venerio holds no position in any stocks mentioned
