Coach Inc.: A Premium Brand At A Discount Price

Jun. 9.14 | About: Coach, Inc. (COH)

Summary

Coach Inc. has a history of decades of past success. Even during the financial crisis, the company was able to keep a top performance;.

The company has been posting disappointing results, providing a negative sentiment around the stock;.

The critical success factor will be keeping an attractive portfolio of products. The new creative director, Stuart Vevers, will have a decisive impact on this matter;.

The skills that made possible the past success of the company along with the refreshment provided by the new creative director will increase the likelihood of a successful turnaround.

Introduction

Coach Inc. (NYSE:COH) designs, sources and sells affordable luxury accessories to the mass market. The company started as a small atelier in Manhattan and grew to become a leading marketer of high quality aspirational handbags and accessories. Today, Coach is recognized by its distinctive brand which has developed a significant degree of customer loyalty.

During more than 30 years, with Lew Frankfort at the helm, the company opted to control its distribution in full, in order to enhance the brand awareness and to control the whole buying experience. This resulted in a brilliant growth during the last couple of years.

Table 1 - Summary of the Income Statements 2013 - 2007 (Source: COH 10K)

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The company's performance was fantastic. The sales have grown at 11.7% annually, the margins are excellent and the earnings per share more than doubled since 2007.

Graph 1 - Coach Inc. versus the S&P 500 20013 - 2007 (Source: Google Finance)

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During some periods, the market has rewarded the company for its good business performance. Specifically, between 2010 and 2012, Coach has seriously beaten the S&P 500 returns by a wide margin.

Current Market Appraisal

Currently, there is a negative sentiment around the stock. The company has been posting disappointing results, with quarterly falls in sales and profits, especially in North America. The main problem pointed to the company's execution is the lack of a global lifestyle portfolio of products. At the same time several competitors are eating market share from Coach. These competitors are perceived as more effective and agile, while Coach is seen as a mature company struggling to efficiently perform a turnaround.

Opportunities

1- International growth: The expansion in China and the entry in Europe, promise to be the drivers in terms of revenue growth. There are plans to open several stores in both markets during the next couple of years. The choice of Victor Luiz, former president of Coach's international operations, to succeed Lew Frankfort, is a clear indication the international expansion is to continue.

2- Product portfolio: The move from accessories to a full lifestyle brand will allow increasing the cross-sell of products like jewelry and footwear, while pushing brand awareness to new markets. The hiring of Stuart Vevers, the new Executive Creative Director, is clearly a push towards the ambition to become a full lifestyle brand.

3- Omni-channel strategy: Coach is reorganizing its stores in order to be able to harmonize them with the online offerings. One example is the launch of targeted invitations to buy certain products online, at a discount, but only during a limited period of time. Leveraging social networking and social media will be very important in the following years, if the company wants to keep up with the aggressive competition.

4- Men's Accessories strategy: The company has been opening several stores dedicated to men in addition to setting up dual genders stores. The company expects this to be a high growth segment in the following years (Source: Forbes).

Looking at what the competitors like Kate Spade and Michael Kors are doing, I don't see Coach missing anything. The industry as a whole is pretty much concentrated in widening the product portfolio, leveraging the online retail and social media, expanding men's offerings, and doing all of this internationally.

Therefore, in the end it will get down to the ability of maintaining an attractive product portfolio. As I mentioned on point 2, Stuart Vevers was the man chosen to refresh the company design and to execute ambition of transforming Coach into a lifestyle brand.

The first fashion presentation for Stuart Vevers, happened in February. The first reviews were encouraging:

"When Vevers, who previously helmed the LVMH-owned Loewe label, was tapped to replace Reed Krakoff last year, insiders wondered about the need for a clothing line from Coach. Could Vevers make it relevant? He could and he did. Editors walked away raving about the collection, not least of all because of the accessibility factor. Vevers' coats and jackets will top out at around $3,000-an opening price for a shearling from a European luxury brand-and most will retail for much less than that." (source: style.com).

Conclusion

The negative sentiment toward the stock has moved it down 45%, since 2012. In my opinion, this is the opportunity to own a premium brand at a discount price. The company has been able to grow and maintain a leading market share. At the same time, the company's margins are very good and have been steady over long periods of time. On the other hand, the current market appraisal is too negative, with the stock trading at 13 times 2013 earnings. My view is that a company that was able to achieve so much in the last couple of years, could not have lost all its know-how in a few months. Clearly the competences that made Coach a great fashion company are still there and will provide the fuel for the comeback.

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.