Coach: International And Men's Businesses Could Be A Highlight In Tomorrow's Release

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Coach Inc (COH), a leading American marketer of luxury handbags and other fashion accessories, will report its Q1 fiscal 2014 on October 22. Its North American results will be keenly tracked by analysts as the company had reported disappointing results from the region in the previous quarter. With a decline in consumer spending, due to the budget dispute in Washington, as well as a change in spending patterns, it is unlikely that Coach will perform any better in this quarter. Moreover, North America has been a tough market for the company in the recent past due to rising competition from upcoming fashion companies such as Michael Kors, Kate Spade and Tory Burch.

We believe that the company's North American results will remain weak in the near term. Since these operations account for about two-third of Coach's sales, the retailer's overall results will also feel the negative impact. However, Coach's international and men's business hold some upside for the company's results, and this could be a highlight in its release.

It will be interesting to see Coach's progress on its brand transformation strategy, as its success is the key for the company to sustain its market share in the North American handbags and accessories market. Coach's profitability could come in lower than the prior year due to the weaker yen, and increased investments in international markets and brand transformation strategy.

Recap Of Q4 2013 Results

Coach reported net sales growth of 6% annually in Q4 2013 on 6% and 7% growth in North American and international sales respectively. Weak North American sales was the highlight of this quarter as comparable stores sales fell by 1.7%. In addition, the weaker yen posed a headwind as total sales rose by 9% in constant currency terms.

Operating margin fell to 26% compared to 30.4% in Q4 2012, owing to acquisitions of distributor businesses in Asia and recognition of $53 million charge on extraordinary items.

Brand Transformation Strategy Could Take Some Time To Yield Results

Coach is undertaking a brand transformation strategy to position itself as a global lifestyle brand anchored in accessories. It is re-aligning its products, stores, marketing and executive management team as part of this strategy. We believe the positive results of this transformation will start to be seen from the holiday quarter, and the overall transitioning will take a few years to complete.

International Sales Will Continue To Grow At A Healthy Rate

Growth in international sales represents one of the key long term growth drivers for Coach. In Q4 2013, Coach's international sales rose by 17% in constant currency, on the back of a solid 35% rise in Chinese sales. Chinese results will continue to be the focus this year as Coach estimates Chinese sales to grow to $530 million in fiscal 2014, as compared to $430 million in fiscal 2013. Coach's expansion plans in China during the fiscal year include 30 new stores, which will enhance its total square footage by 25% in the region. In addition, Coach's sales in the Asian markets of Korea, Taiwan, Malaysia and Singapore continue to rise at a healthy rate.

Coach aims to grow aggressively in Europe as it plans to open 70 wholesale and 10 retail stores across the region during the fiscal year. Coach also intends to enhance its distributor-run business in Latin America, other Asia-Pacific countries (Australia, Thailand and Indonesia) and in the Middle East. As a result, we believe the proportion of international sales in Coach's overall sales will rise in the future. (Coach's CEO Discusses F4Q 2013 Results - Earnings Call Transcript, Seeking Alpha, July 30, 2013)

The weaker yen continues to pose a headwind in this segment. Japanese sales declined by 15% in Q4 fiscal 2013 in dollar terms, even though they increased by 4% on constant currency basis. We believe the weaker yen will continue to impact Coach's results in the near term.

Men's Business Represents Another Growth Driver

The men's business, which grew by approximately 50% in fiscal 2013, continues to be a long term driver for the company. We believe this business will continue to rise at a strong rate in the future and help drive both its North American and Asian sales.

Our $59.5 price estimate for Coach's stock, represents 10% premium to the current market price.

Disclosure: No positions