Coach (COH) is a leading US retailer of luxury lifestyle handbags and accessories which competes with exclusive brands like Louis Vuitton (OTCPK:LVMHF), Hermes, Gucci (OTC:GUCG) and Prada. Coach has historically enjoyed among the highest gross margins in the apparel and accessories industry.
However, due to the weakening economy, the company saw a decline in its EBITDA margins during 2008-2009, as consumers cut back on discretionary spending and became more value conscious. We believe that the recovering economy and higher handbag pricing will revive EBITDA margins for Coach’s handbags business in 2011 and beyond, resulting in an upside of about 10% to the $46 Trefis price estimate for Coach’s stock.
Handbag Margins Declined Due to Falling Sales at High Margin Full-Priced Stores
Coach’s EBITDA margin for its handbag business declined from an estimated 41% in 2007 to 33% in 2009, attributable to increasing share of handbag sales coming from Coach’s factory stores rather than higher margin sales at full-priced stores. Factory stores offer goods at discounted prices, offering Coach lower sale margins compared to full-priced stores. The mix shift in demand was driven by rising value consciousness amongst consumers during the economic downturn.
Higher Handbag Pricing Will Mean 10% Upside to Coach’s Stock
Coach’s handbag prices are now 12% lower than a year ago. The average Coach handbag costs in the range of $275 to $325. However, with recovering sales of handbags priced over $300, we expect Coach to raise its handbag prices by the end of 2010. We estimate a 10% increase in handbag prices would result in a 6% percent increase in handbag EBITDA margins in 2011 and that such a margin improvement over the Trefis forecast period could result in an upside of $4.50 (10%) to the $46 Trefis price estimate for Coach’s stock.
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