Coach Inc. (NYSE:COH) is a hot discussion point for investors as they have no clue where this company is going. Investors should put recent past figures aside and focus on the execution of upcoming plans. This company will have innovative designs and that should help to raise the company's top and bottom lines. Although the company is currently struggling, let's focus on its branding recovery strategy. The beginning of this strategy started with hiring Stuart Vever as Coach's new designer last year.
Although the company is struggling in North America, recent results showed that its international sales have increased by 2 percent. One reason behind this international growth is the 25 percent rise in sales in China. It is believed that China is becoming the company's international sales hub and caused the company's management to initiate plans to boost its sales in China.
Opportunities in China
The following are sales facts about China:
- Chinese consumers contribute 25% to the total luxury purchases around the globe, compared to 20% by U.S. shoppers.
- Approximately 60% of these purchases are made outside of China.
- A further 23% of these purchases are made through e-commerce retailers like Amazon, Ebay (EBAY +0.86%) and direct-to-consumer channels of foreign luxury brands.
Management is planning to open more stores in China in order to reap the benefits of China's emerging fashion industry.
Coach intends to change its policy of selling expensive handbags. The company was losing its major target population and market share which resulted in a decrease in revenues. The company is opening special discount outlets in North America in order to revive its lost image.
Coach will begin its advertising campaign in September 2014. For the upcoming advertising campaign, it hired Stephen Meisel, one of the most successful and renowned fashion photographers in the world. The company also replaced famous models they used in previous advertising campaigns with up-and-coming models. Ultimately, the new COH advertising campaign will emphasize that COH is a brand of quality, leather and craftsmanship. It is expected that the new advertising campaign will show positive results.
Closure of Underperforming Stores
The company's management is working hard during this tough time to regain its image. It is planning to shut down 70 underperforming stores in North America. These stores were increasing costs rather than contributing to revenue. Management believes that this is only a short term step to cut its cost; however, the company plans to open more stores with new variety and innovation in various parts of North America.
Men's & Women's Handbags
The company's main focus has always remained on its core business of manufacturing fashionable bags for both men and women. The company intends to plan its strategies in accordance with the demand for its handbags. This segment contributes nearly 65 percent of the company's overall revenue and is responsible for 62.8 percent of the changes in its stock price.
Coach believes that bold changes need to be made. These include gaining a significant presence in men's accessories and increasing its reliance on sales from the fast-growing Asian market. Coach believes there is a potential $12 billion market in Asia.
Revenue from its men's business went up 50% in fiscal year 2013 but still only accounted for $600 million of its total $5 billion in annual sales. Coach is opening new stand-alone men's stores to try to boost sales. Management thinks it can boost the sales of its men's business to $1 billion by fiscal year 2016.
Based on forward its P/E of 18.03 and EPS of 3.28 the company's fair value is $59.13. The company's current market price is $34.25. Hence, COH is undervalued which meaning now is a perfect opportunity for investors to purchase this stock. In the future, COH's stock price will move towards its fair value as the company has innovative plans to recover its position in the market.
Comparing with its Rivals
The table above shows a comparison of Coach's stock with its competitors. Although these rivals are ruling market share, they are very overpriced compared to our base stock, COH. Coach's P/E, forward P/E, and P/CF show that its price and its EPS are smaller than the other two industry competitors.
The company's sustainable growth for the future is estimated to be 16.4 percent based on the current ROE of 40.03 percent and dividend payout ratio of 41 percent. Coach's expected growth rate is greater than the leader of the industry which is 14.77 percent. With a dividend payout ratio of 41 percent, investors willing to earn gain in the short-term will be exited to buy this stock as its current dividend payout yield is 3.96 percent.
Coach is reestablishing itself as an internationally innovative brand. The company is also enacting the right steps to regain its position in North America. The company is undervalued which makes it a cheap stock to buy right now before it reaches its fair value and becomes too expensive for growth-oriented investors. The company has smaller price multiple ratio values compared to its competitors which makes it eye-catching among other companies. This stock will be flying high in terms of returns and revenues so investors should put Coach in their growth portfolio.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.