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Coach Inc. (NYSE:COH) is transforming itself to become a lifestyle brand. Its men's accessories business is showing rapid growth. It has re-launched its footwear collection in 170 stores where customers have showed positive response. All these things will work in the company's favor and help it generate additional revenues. Let's take a look at these initiatives in detail.

Growing Men's Business

Coach sees an opportunity in its men's business as it is rapidly expanding and Coach has experienced continuous growth in this business in the past 3 years.

Year

2010

2011

2012

2013

Year-over -year change

-

100%

100%

50%

% of sales

2.6%

4.7%

8.3%

11%-12%

Source: Company Annual Report

Above chart indicates 100% sales increase in men's business for Fiscal 2011 and 2012. In 2013, sales increased by 50% to $600 million. It comprises approximately 11%-12% of the company's total sales, up from 8% in 2012. If the company continues to show this same growth, it is expected to reach $1 billion sales over the period of next two-three years which will be about 15% of the company's total sales.

Transformation to Lifestyle Brand

Coach has leveraged its 'house of leather' image over the past 15 years and now wants to take the next step. The company is planning to move from its core competency of handbags to head-to-toe offerings. Coach is looking forward to transform its brand and to become a full-fledged lifestyle brand. In order to achieve this goal, Coach has decided to leverage upon its brand name and expand into footwear and eyewear categories along with addition of the apparels category. Major challenge the company will face in this strategy is increasing competition as most of the competitors like Michael Kors (NYSE:KORS), Tory Burch and Kate Spade are heading towards the same goal. It will affect the company's short term margin but in the long term it will help the company to grow.

Factory stores

A factory store is an efficient way to sell discontinued and irregular inventory outside the retail channels. It targets mostly tier-II and tier-III customers who can't afford to purchase coach products otherwise. Price charged for these products is 20%-70% below the regular retail price. Coach operates 191 factory stores which represent around 1/3 of total North American stores. It has seen highest square footage growth of 21.7% in factory stores in 2012.

June 30, 2013

June 30, 2012

July 2,2011

July 3,2012

Factory Stores

191

169

143

121

Net Increase vs. prior year

22

26

22

10

Percentage Increase vs. prior year

13.02%

18.18%

18.18%

9%

Source: Company Annual Report

Coach has the highest number of factory stores as compared to its competitors. It has 191 factory stores as compared to 148 of Ralph Lauren (NYSE:RL), 103 of Michael Kors, 46 of Kate Spade and 10 of Tory Burch. Increasing the number of factory stores helps to broaden the customer base and generate additional revenue.

Footwear re-launches

The company has re-launched its footwear collection in around 170 stores with updated assortments. The company has been successful in this strategy as it has helped to increase footwear penetration from 3% to 12%. Footwear sales in North America have increased by approximately 2% as a result of this re-launch. Looking forward, the company is planning to rollout this collection in another 50 stores. In addition to this, Coach has started installing shoe salons in 75+ locations.

Peer Analysis

Ralph Lauren Corp and Michael Kors Holding Limited are two important competitors of Coach in apparel and accessories segment.

Ralph Lauren Corp. is investing in e-commerce initiative, unit expansion plans and technological advancement. E-commerce comprises approximately 6%-7% of the total sales of the company with e-commerce facilities available in 11 countries. Under this initiative, it has launched its Club Monaco site in North America, Ralph Lauren site in Japan and is planning to launch new sites in Korea and China. It has implemented SAP for global procurement and order-to-cash processes. The company is strategically planning to expand business with integration of Chaps men's sportswear in its business. The company is targeting aggressive unit expansion in China and Northern Europe with 12 new stores openings in 2013.

On similar lines, Michael Kors Holdings Limited another peer company of Coach is expanding geographically with opening of three new stores in North America, three new stores in Japan and one store in Europe in the fourth quarter 2013. It has put greater emphasis on new store openings and raised its new stores opening target in Europe from 100 stores to 200 stores. The company is looking forward to add 50 in North America, 7 in Japan and 40 in Europe in FY2014. Kors is planning to bring its American E-commerce business in house which will help the company to have better control on online transactions and increase offerings. Management believes this step will be 10% accretive to its revenue.

Company

Forward PE

PEG

COH

12.13

1.21

RL

17.01

1.77

KORS

20.58

0.95

Coach has the lowest PE of 12.13 and Michael Kors is trading at the highest PE of 20.58 among these three companies. Coach's PEG ratio is also slightly higher than Kors. Kors, with lowest PEG ratio of 0.95, shows the highest growth prospects for future. Ralph Lauren is trading at high PE of 17.01 and PEG of 1.77 which is not a positive sign.

Conclusion

The company is exploring an opportunity in its men's business and factory stores. It will help the company to expand geographically and generate revenue. Re-launching of its footwear business has started gaining momentum with increased penetration. The company is moving towards transforming into a lifestyle brand which may affect its short term profitability but going forward it will contribute to the company's growth. So I recommend buying.

Source: Should You Bet On Coach's Transformation?