Coach: Transformational Plan Is Unlikely To Bring In A Drastic Turnaround

Aug.24.14 | About: Coach, Inc. (COH)

Summary

The company’s top line witnessed a decline of 5.3% during 2014, mainly on the back of lower revenue generated from the North American business.

Growth in the international business segment was mainly contributed by double digit growth in China and Asia excluding Japan.

The company’s operating margin has also shrunk to 23.3% in the fiscal year 2014 compared to 30% in the prior year.

Coach’s management announced a multi-year strategic transformation plan in order to re-establish the brand’s image. A number of operational and cost objectives have been quantified to implement this strategy.

Apart from cut-throat competition, global economic environment is still adversely affecting the consumer confidence which ultimately determines the spending on Coach’s products.

Coach, Inc.'s (NYSE:COH), a leading New York design house of modern luxury accessories and lifestyle collections, has recently reported its financial results for the fiscal year 2014. The company's stock price has been descending for quite some time now. Let's take a look at the company's performance, reasons for the biennial price decline and determine whether this trend will continue or reverse.

Coach Price Chart

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Source: Google

Recent Performance At A Glance

Top Line

The company's top line witnessed a decline of 5.3% during 2014, mainly on the back of lower revenue generated from the North American business due to lower customer traffic and lower wholesale sales due to lower shipments. The negative sales growth in the North American region was partially counterbalanced by growth in the international business segment which was mainly contributed by double digit growth in China and Asia excluding Japan. Apart from the takeovers and mergers, the company had invested in opening 34 net new stores in China, Hong Kong and Japan. Eliminating the foreign currency impact mainly due to Japanese yen, sales were down by 3.1%. I believe that the company is working on reducing its reliance on the US economy, its main market for now, and trying to geographically expand in the rest of the world, particularly the key emerging markets that uphold a huge growth potential.

During the fiscal year 2014, Coach has cut down on the number of both retail stores and total square footage in an attempt to optimize its real estate usage in the North American region. Retail stores operated by the company were brought down to 332 by the year end from 351 during the previous year. Also, retail square footage also decreased by 4.5%. Outside US, the company has expanded its retail network in order to enhance its international presence and become less dependent on one single economy i.e. US. However, it expanded the outlet store network in the North American region from 193 in the prior year to 207 this year.

Operating Margin

The company's operating margin has also shrinked to 23.3% in the fiscal year 2014 compared to 30% in the prior year. Eliminating the items that can affect comparability, operating margin was down to 26% in the period under discussion from 31.1% a year ago.

The negative effect had trickled down from the upper line item of cost of sales as the North American segment's gross margin had plummeted by 310 basis points due to higher promotional spending on outlets opened in the region and higher average unit cost. The negative movement in the international segment's of 180 basis points was primarily due to the volatility in the Japanese yen.

Selling expenses incurred had also shot up to 45.3% as a percentage of sales during 2014 from 42.8% in the same period last year. Following the divestment from Reed Krakoff business, marketing expenditure was slightly down by 0.2% of sales which was offset by a matched increase in administration costs due to higher depreciation as the company invested more funds in the business.

Transformation Plan

During its last quarter of 2014, Coach's management announced a multi-year strategic transformation plan in order to re-establish the brand's image. A number of operational and cost objectives have been quantified to implement this strategy. The company will be actively working on this strategy in the upcoming fiscal year 2015 and it is expected to shut down nearly 70 underperforming retail stores to save unnecessary costs. Coach will be investing another $500 million on the refurbishment of its stores in prime locations in 2015 and 2016. Additionally, the management has allocated $50 million to promote its new strategy in 2015 while cutting back on promotional costs incurred within its outlet Internet sales site.

Future Outlook

While the company is taking all possible steps to rejuvenate its falling business, the future outlook remains rather uncertain in spite of the improvement witnessed in the global economy. The global economic environment is still adversely affecting the consumer confidence, which ultimately determines the spending on discretionary items by people.

The company is planning on conducting more promotional activities to improve the consumer retail traffic that continues to remain relatively weak and inconsistent. Cut-throat competition is also another problem confronted by Coach and an approach to offset traffic declines with higher levels of turnover.

Conclusion

The future prospects of the company remain bleak for the near future. I believe the company's transformational plan is unlikely to bring in a drastic turnaround in its financial results anywhere in the near future.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.