Coach: Still In The Game

| About: Coach, Inc. (COH)

Coach Inc. (NYSE:COH) is a marketer of fine accessories and gifts for women and men. Its product offerings include women's and men's bags, accessories, business cases, footwear, wearables, jewelry, sunwear, travel bags, watches and fragrances. I feel that the company is one of several large cap firms within the consumer discretionary sector that offer a great opportunity for share appreciation and dividend collection. My positive investment thesis for Coach Inc. is based upon nine key criteria, which include:

Key Selection Criteria

1. A market capitalization over $10 billion.

2. A leadership position within a growing industry.

3. A dominant, or large, market share within its product mix.

4. A strong position internationally.

5. A strong balance sheet and high credit rating.

6. A high free cash flow number.

7. A low historical relative valuation as measured by price/sales and/or price/earnings ratios.

8. A strong dividend growth rate.

9. A catalyst of new revenue opportunities.


Coach is a large-cap consumer goods firm with a current capitalization of $15 billion.


Coach has maintained a leadership position in the apparel, footwear and accessories industry, specifically in the luxury handbag market. Coach has continued to hold a 28% market share in the face of increased competition, notably from Michael Kors (NYSE:KORS) and Tumi (NYSE:TUMI). Coach's core strength is its 72-year old brand and its product innovation and evolution.


Coach, Inc.

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Total Intl. Revenue

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Source: Coach, Inc. Annual Report

International revenue has played an increasing role in Coach's revenue line. Coach is building a strong global presence with 400 directly operated locations in Asia and 20 stores in Europe. Coach posted strong international sales at $1.54 billion end of FY 2013 (June 30, 2013), a 9.9% increase from $1.40 billion the previous year. China was the main contributor to this increase, with sales up 31% Y/Y.

Balance Sheet/FCF

The balance sheet of Coach is in excellent condition. Free cash flow generation by Coach has been consistent. Free cash flow has grown from $910 million to $1.2 billion since 2009. In the past decade, Coach has grown free cash flow by nearly 19% per year (286M vs. 1173M). Coach should generate nearly $1.3 billion in free cash flow next year. I view the firm's balance sheet favorably given the positive metrics. Coach has no debt and a return on capital of 40% over the last 5 years. Operating margins, although declining somewhat, remain at a very high 28%, topping the industry average.










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Source: Coach, Inc. Annual Report

Relative Valuation

As for relative valuation, I have a preference for price/sales ratio when examining the merits of a consumer discretionary company. Coach is trading toward the very bottom of its range in history in terms of price to sales at 2.75 TTM. Coach has traded at a price/sales ratio range of 2.4 to 7.2 in the past decade. The average price/sales ratio for the previous ten years has been 4.8.

Over the last few years Coach has reduced its share count with constant share repurchases. Last October, Coach announced the approval of a substantial $1.5 billion share buyback plan through June 30, 2015. In its recent fiscal Q1, Coach bought back 3.3 million shares for $175 million. This leaves over $1.2 billion remaining under its current repurchase authorization. Buybacks have had a strong impact on share count as total share count has been reduced in the past five years from 3,180,000,000 shares to 2,814,000,000 shares. This is a total reduction of shares outstanding of nearly 12%. This share count reduction will continue to allow Coach to return capital to its shareholders and generate strong sales per share growth.

Sales per share have increased at a sizable double-digit rate at Coach through the past decade. Coach is now trading at a steep discount to the industry (Michael Kors selling at over 5 times sales). Given its continued growth opportunities (U.S. square footage increases, international growth potential and new product lines), I feel that Coach can continue to grow overall revenue at an unassuming 5% pace. With the addition of stock buybacks, I thus expect Coach to deliver sales per share growth of 7.5% by 2016. This would result in Coach's sales per share reaching 20.75 in three years. At a projected return to a sales per share multiple of 4 (still below historical average of 4.8), I project that Coach stock could ultimately trade at $83 a share by the end of 2016.


Price/Sales Ratio Avg.

Sales Per Share













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Source: Coach, Inc. Annual Report

2016 SPS Projected


Price/Sales Ratio 2016


2016 Target Price


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Dividends have grown on a consistent basis for Coach over the preceding five years. Since beginning a payout dividend in 2009, dividends have escalated from $0.08 cents to $1.20 a share in 2013. It recently upped its dividend to .3375 a quarter versus .30, a 12% year-over-year increase. Coach currently yields an above market 2.3%.

Coach, Inc. Dividend Payout History - 5 Years

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Dividends Per Share






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Source: Coach, Inc. Annual Report

Coach currently pays out 33% of its earnings in dividends, a reasonable level. If Coach increases its dividend by a modest 12.5% in the next three years, the projected dividends collected would be $1.35, $1.52 and $1.71. Added to my target price through price/sales analysis, an investor in Coach would collect $4.94 in dividends on top of a price gain of $32 ($83 target minus $51 current price of COH). This would result in a total investment gain of 73% over the ensuing three years.


Coach has been facing unique loss of market share over the last couple years due to increasing competition. In the most recent financial release, Coach's total revenue slipped nearly 1% to $1.15 billion. However, excluding currency impacts revenue was actually up 2%. Although Coach witnessed a decrease in U.S. sales of women's bags and accessories, it had an increase in sales in footwear, ecommerce and its men's line. Footwear was re-launched in 170 retail stores in the past 6 months, contributing to 8% of business within those stores, versus 4% last year. There is also strong potential in Coach's men's line (an underserved market), which comprises just over 10% in sales. Coach remains ebullient on its men's business arena, attempting to drive this niche to a billion dollar business. The firm is also adding new dedicated areas for menswear. Coach is even expanding its presence in jewelry, watches, eyewear and fragrance.

Despite the sluggish U.S. sales in handbags, Coach is continuing to expand stateside. Coach is increasing its square footage 7% through 20 new store openings and 20 expansions, including two new store concepts at flagship locations in New York and Southern California. Coach thus should be able to demonstrate continued revenue growth through its new product transition, despite the competition from Michael Kors and others. The additional merit of Coach's business model is that international sales remain a modest part of Coach's current revenue line. As international sales continue to make up a larger part of overall revenue, sales per share growth will accelerate. Coach can take sizeable market share from European luxury goods makers. Coach expanded in Europe via a 50-50 joint venture with the British men's wear brand Hackett, which is owned by Pepe Jeans SL. It opened its first European flagship, on New Bond Street in London, in September 2011. Since then, Coach has opened up a shop at Harrods in France, El Corte Inglés in Spain, and its first German store in Metzingen. Earnings from Europe should soon reach $500 million. The company also is expecting a similar revenue line addition in China. Coach opened its 100th location in mainland China this year, and now has a total of 118 stores in the region. The company projects that its China business can grow to over $500+ million in sales by the end of 2014. As China currently represents less than 7% of Coach's total sales, the opportunity over the next decade is enormous. The company is planning to expand its square footage internationally by 9% over the next twelve months.

Coach looks undervalued when compared to its pears. COH trades at only 14 times earnings, well below Kors and Tumi. These competitors trade at 32 and 38 times, respectively. It maintains a stellar balance sheet with strong free cash flow generation. With international growth in Europe and China alone, Coach should easily be able to generate the minimum 5% revenue growth per year I forecast to meet my SPS growth targets. Coach's management team just needs to stop the bleeding in U.S. sales. With its new revised footwear and Men's line offsetting the weaker handbag sales, Coach should be able to stabilize U.S. sales over the next couple of quarters. This will allow investors to focus on the stellar international growth in Coach's future.

The opportunity for Coach to hit my target of 20.75 SPS by 2016 is very reasonable given its new product lines and international growth capabilities. Add in sizeable growing dividends and Coach is a solid investment candidate for the total return investor.

Disclosure: I am long COH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.