Coach - Stock For Sale

Aug. 1.12 | About: Coach, Inc. (COH)

Coach (COH) the marketer of fine accessories and gifts reported its fiscal fourth quarter results on Tuesday before the market open. Shares fell an incredible 18% in the following trading session.

Fourth Quarter Results

Coach reported fourth quarter revenues of $1.16 billion, up 12% compared to last year. Net income rose 24% to $251 million, or $0.86 per share. Earnings per share rose 27% compared to last year's earnings of $0.68 per share. Analysts were expecting the company to report fourth quarter earnings per share of $0.85, on revenues of $1.20 billion.

Full year sales rose 15% to $4.76 billion. Net income rose 18% to $1.04 billion, with diluted earnings per share for 2012 increasing 21% to $3.53.

Lew Frankfort, Chairman and CEO commented, "We made significant progress against our key initiatives - aggressively growing our international business, becoming a market leader in the Men's accessories category and harnessing the power of the digital world."

Growth Slowdown

Today's pullback is largely the result of a sharp decline in the quarterly sales growth rate. Fourth quarter revenue growth slowed down to 12% on the year, compared to a 17% growth rate in the third quarter. North American comparable sales grew only 1.7% for the final quarter, marking full year comparable sales growth of 6.6%.

CEO Frankfort commented on the slowdown, "an increasingly promotional environment in North America led to slower growth as shoppers' appetite for coupons was insatiable."

Coach actually pulled away from coupons earlier this year, resulting in a sales growth decline at its outlet stores. The company announced that it reinstated coupon programs it its outlet stores, resulting in a notable uptick in business again. Furthermore many mid-end retailers have been hit hard by a slowdown in consumer confidence and spending in recent months. US consumers are nervous about the slowdown in the economy and the discussions regarding the "fiscal cliff".


Coach stated in its outlook for its fiscal 2013, " we are mindful of balancing the impact of the muted consumer environment in North America and a softening global macroeconomic outlook with our optimism around the launch of Legacy." 2013 will be an investment year with the acceleration of retail operations in Asia and the development of the infrastructure to growth the overall business.

The company remains committed to achieve double-digit revenue and profit growth over the near term horizon, driven by more store openings in North America and Asia in particular. For the full year of 2013 Coach sees same-store sales growth in the US slowing down to a low to mid single digit rate, compared to 6.6% for the full year of 2012. Furthermore first quarter results will be under pressure as a result of a strong US dollar and store enhancement initiatives will result in operating margin compression to an expected 31%.


Coach ended its fiscal year of 2012 with $917 million in cash, equivalents and short term investments. The company operates with $21 million in short and long term debt, for a net cash position of almost $900 million. Based on Tuesday's closing price of $49.33, the market values the firm at $14.2 billion, or $13.3 billion for its operating assets.

Based on the full year revenues of $4.76 billion and net income of $1.04 billion, the market values the firm at 2.8 times annual revenues and 13 times annual earnings. This valuation multiple compares to a 2.0 times annual revenue multiple for its competitors Ralph Lauren (RL) and Guess? (GES). These competitors trade at 20 and 11 times earnings, respectively.

Currently Coach pays a quarterly dividend of $0.30 per share, for an annual dividend yield of 2.4%

Investment Thesis

Shares of Coach trade with losses of almost 20% year to date, entirely attributable to weak fourth quarter revenues and a soft 2013 outlook issued today. Shares have lost nearly 40% from their peak of $80 in March of this year as investors worry about the impact of a global economic slowdown on the prospects for global luxury firms.

As a result of its cautious outlook, including the soft guidance for its North American operations into 2013, investors are rushing for the exit doors today. Still there are some bright spots for investors in today's report. First of all, there is the Men's initiative, which generated $400 million in annual revenues in 2012, double the amount compared to 2011. Furthermore Chinese sales grew 60% over the year to $300 million, starting to make a meaningful contribution to future growth. Aggressive store openings in 2013 will provide a revenue boost as well.

Tuesday's sell-off is party self-inflicted as a result of the bad timing of the withdrawal of the coupon program and the general economic slowdown. However an almost 20% sell-off provides long term investors with an excellent opportunity to pick up a premium brand at a discount price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.