Coach: Takeover Rumors Rise Again With LVMH As The Suitor

| About: Coach, Inc. (COH)

Summary

Over the summer, Kering was rumored to be interested in taking over COH for $48 a share--a rumor that faded away.

This week LVMH was rumored to have “shown interest” in taking over COH at an unknown price as bullish call option activity heated up once again.

COH’s current creative director formerly worked for LVMH with respect to their Loewe brand.

We see value in COH shares given the takeover rumors and that COH management is pursuing all initiatives to place the company on a stable long-term footing.

The shares pay an over 3 percent yield that the company is committed to continue paying as plans to transform its brand go into effect.

Over the summer there were rumors that Coach (NYSE:COH) was an acquisition target of a company named Kering. Now, just a few months later comes word that LVMH has taken a look at COH as well. The LVMH takeover rumors arose when unusually options activity occurred earlier this week in addition to rumors that LVMH had "shown interest" in COH. As usual, however, commentary quickly came out spreading doubt that LVMH would or could takeover COH given COH's size and market capitalization. LVMH is known to have acquired many companies in the past and has the funding to do many deals. The slightest mention of a possible acquisition of COH sent the company's shares up 3.5 percent at one point. It should be noted that COH's creative director, Stuart Vevers, arrived at the company from LVMH's Loewe business. This rumor, like the prior rumor, may not prove accurate. However, each rumor we hear of reminds us that COH shares are likely worth 15 to 25 percent more than the market is currently pricing them. With the end of 2014 rapidly approaching, tax loss selling will dissipate and we may see COH shares rise early in 2015 as selling pressures ease. In addition, COH's turnaround plans may begin to show slight hints of the beginning of a turnaround.

We have noted recently that COH's most recent earnings report was clearly negative, but the company had already indicated that all of fiscal 2015 results would show negative earnings and revenue results. The company expects revenue and earnings to grow again in fiscal 2016 after their 2015 "reset" year. In commenting on the latest quarter's results, COH indicated that products priced over $400, all-leather products, and novel styles performed well under the circumstances. The company also indicated that given their large reduction in promotions the success of their new products was too small to affect overall results for the quarter. COH also stated that, while their observation may be premature, they saw positive signs and positive comparisons for their over $400 category, but said visibility was difficult with their reduction in promotions.

While COH has been struggling, we discussed in a previous article the company's detailed and sophisticated plans that were targeted to transform the company from an "accessible luxury" accessories brand to a "modern luxury" lifestyles brand. Since COH announced their turnaround blueprint, the company has been aggressively engaged in revitalizing their brand. Whether an actual LVMH buyout of COH ever surfaces, we are encouraged that such rumors rise from time to time indicating to us that COH shares have more value that what is currently being assigned to them by the market. We reiterate our strong belief that COH's plans will rejuvenate the brand and the company's share price in 2015 and beyond.

Our Conclusion

We have repeatedly indicated that COH is navigating through difficult times. We have stated our belief that the company's ongoing branding reset plans are well thought out and likely to put COH on the road to repairing their brand. We also like the innovative ideas that the company is putting out into the market, such as limited series products to revitalize exclusivity in the company's brand. Now, with word of another rumored acquisition of COH by LVMH, we are heartened that other companies are likely showing interest in COH and indicating there is strong value in the company and their shares. Whether yet another takeover rumor of COH pans out, we continue to be encouraged with all of the initiatives COH management has put in place to put the company on stable footing for a long and healthy future.

We continue to believe that COH's setback is not permanent and need not take as long to recover from as analysts estimate. While the company's recent earnings were clearly negative, COH had indicated that their earnings would be negative in all of fiscal 2015 during their June 2014 analyst meeting. Analyst estimates average $2.04 for the 2016 fiscal year as the company heavily reinvests in transforming their brand. COH is a highly profitable company with an iconic brand that operates in a highly-profitable business that is making the short-term painful steps of reducing promotions and invigorating their brand for the long-term health of the company. We believe COH shares are a speculative buy right now for those investors with an intermediate or long-term time horizon. In addition, continued takeover rumors of COH, whether they occur or not, reiterate out belief in the value of the company's shares. Finally, COH shareholders will be rewarded with about a 3.9 percent dividend while the company's detailed plans to reinvigorate and transform their brand take hold.

Disclosure: The author is long COH.

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.

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