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In the recent quarterly results of Coach (COH), its North American region witnessed 1% decline in direct sales coupled with 6.8% year-over-year decline in comparable store sales. This decline in comparable stores is Coach's worst performance in the past 17 quarters.

Coach expects that its North American sales will drop by high single digits for the rest of the year. Increased competition is the primary reason for declining traffic in Coach's stores in North America. Although, the company is looking to expand its men's business to counter the declining sales, but, the big question is -- Will it be enough to make a significant impact in the company's topline?

Suffering from enhanced competition

The North American sales comprise 68% of Coach's overall revenue. The company's quarterly North American sales growth year over year is given below:

Quarter

North American Sales ($ Million)

Year-over-year growth

Quarter ended March, 2013

792.5

7.40%

Quarter ended June, 2013

825

6.00%

Quarter ended September, 2013

778

-1.00%

At the beginning of the year, the company was witnessing favorable North American sales, but in the last quarter, it started showing negative results. Considering quarter-over-quarter growth, the sales have declined around 6.5%. Enhanced competition from new players Michael Kors (KORS) and Fifth & Pacific's (FNP) Kate Spade is the primary reason behind the problem. Both these companies witnessed continued sales gains. North American sales for Michael Kors have witnessed sales growth of 50% in every quarter since its December 2011 IPO. On the other hand, Coach's sales growth has averaged just 9% during the same period.

Michael Kors capitalized on the market's sweet spot by targeting middle income families. It continued its business by introducing lower priced products that appealed to a larger mass of customers. With this, Michael Kors' market share rose 13%, giving competition to the already established 30% market share of Coach. Additionally, Michael Kors plans to open 50 new stores in North America by 2014. These will compete with Coach's 544 stores in North America.

On the other hand, Kate Spade witnessed an increase in its market share to 4%. It increased distribution of it handbag styles, which is the highest selling product of Coach, and accounts for 60% of Coach's sales in North America. The brand is getting a huge response from its e-commerce site, which accounts for 20% of the brand's sales.

Apart from this, Coach is losing ground among young shoppers aged 20-35 years. They are shifting from Coach to Michael Kors and Kate Spade.

Still some hopes from men's business

After witnessing plummeting sales from the women's handbags segment, Coach is attracting men with its product offerings. The sales of bags and accessories intended for men increased 25% year over year. Coach hopes to generate $700 million from men's sales by the end of the present fiscal year. This will be around 14% of the overall sales generated by the company in the last fiscal year. In the last fiscal year ended in June 2013, Coach Men's business witnessed 50% growth to $600 million, which contributed 11% of the overall sales.

Coach is bullish on the prospects of the global men's business. It is focusing on leather products for men in particular, and the company's design team is building a better product line on that front. Coach recently announced it will drive its men's business with introduction of new standalone and dual-gender stores and by facilitating more space for a broad range of men's products in existing retail stores.

Coach is seeing opportunity in men's brands and it will continue introducing new products in the category. We believe Coach's rising men's business can revive its topline. Its overall contribution to the topline of coach has more than doubled from 5% in fiscal year 2011 to 11% in fiscal year 2013.

Declining EPS a concern for investors

Coach witnessed a decline in profits of around 1.5% in the quarterly earnings year over year, but the company's EPS remained the same. Its EPS trend is given below:

Quarter

EPS

Dividend per share

Dividend payout ratio

Quarter ended December 2012

$1.23

$0.30

24.39%

Quarter ended March 2013

$0.84

$0.30

35.71%

Quarter ended June 2013

$0.78

$0.3375

43.58%

Quarter ended September 2013

$0.77

$0.3375

$44.15%

From the above table, we can infer that Coach's EPS has been declining quarter over quarter. Although it didn't decline significantly in the last quarter, the company repurchased nearly 3.3 million shares, which led spending of $175 million. These repurchases form around 1.1 percent of the total outstanding shares of the company, which could have revived the EPS of the company for the quarter. Despite its declining EPS, Coach hasn't stopped paying dividends to its shareholders. Its dividend payout ratio is increasing, indicating that Coach is trying to maintain investors' faith. However, the company's cash balance has decreased by around 24.5% quarter over quarter to $854 million for the last quarter. This questions the liquidity and profitability of the company to continue the dividends.

Conclusion

North American sales don't promise much for Coach since intense competition is hampering its growth. On the other hand, Coach is leveraging its topline by expanding in the men's business.

Although, it is early to say that men's business can substantially benefit the company's topline. Overall, we don't see enough growth drivers for Coach in the near term. We would recommend a hold on this stock, and advise investors not to make any new position.

Source: Time To Be Cautious On Coach?

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.