The $25 billion global luxury market for handbags and accessories (H&A) is projected to grow at an average annual rate of approximately 5% for the next few years. China is expected to be the major driver in increasing the market size. The country, according to various estimates, accounts for 10% of the global market. According to Coach, by the year 2013, China will double its share and contribute 20% of the total luxury market of handbags and accessories. In my last article on Coach, I outlined the growth opportunities in China and estimated that Coach could generate $1 billion in revenues in China by 2020. In the next 5 years, I estimate that the company will grow its earnings in China at an annual rate of 40% and report sales of approximately $537 million from China by 2015. This is higher than the $500 million the company expects to generate from China by 2015.
Additionally, the company recently launched its products in Europe (a flagship store is expected to open in London by June 2011), a continent responsible for about 25% of the global H&A market. Like North America and Japan, Coach is in the process of developing a multi channel delivery system for Europe and expects to generate $250 million in revenues from Europe in the next 5 years. In the years to come, the company also plans to enter the Indian and Brazilian markets.
Outside of China, Coach believes that its biggest opportunity is in the Men’s premium bag and small leather goods sector. The company estimates that it holds a 3% market share in the men’s segment in the U.S and hopes to improve this to about 14% in the next few years. In Japan, while the broader H&A segment is contracting, Coach reported that the men’s segment was stable. The company opened its first men’s only factory store in addition to its two stand alone stores and hopes to gain a market share of 16% to match that of the women’s segment.
In summary, I expect the U.S. sales to increase at an annual rate of 15% for the next 5 years, Japan by 2%, China by 40% and rest of world by 10%. As mentioned earlier, Europe will contribute $250 million to the top line by 2015. Based on my estimates, the company is projected to report earnings of $7.1 billion in 5 years time compared to the trailing twelve month revenue of $3.75 billion implying a compounded annual growth rate of approximately 14%.
Updating my DCF model, I derive an intrinsic value of $63 a share. My relative valuation model indicates a fair value of $45 a share. Combining these estimates, I estimate a fair value of $54 a share which is also my 12-month price target.
(Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.)
Disclosure: Long COH