Coach (
COH
) is a leading American retailer of luxury lifestyle handbags and
accessories. The company primarily competes with other premium
apparel and accessories players like Polo Ralph Lauren (
RL
), Liz Claiborne (
LIZ
), and AnnTaylor (
ANN
). We estimate that the handbags division is the most valuable
division for Coach, generating 57% of the
$55 Trefis price estimate for Coach's stock
.
In fiscal 2009, the company acquired the Coach domestic retail
businesses in Hong Kong, Macau and mainland China (''Coach
China'') from its former distributor, the ImagineX group. These
acquisitions provide the company with greater control over the
brand in China, enabling Coach to raise brand awareness
and aggressively grow market share with the Chinese
consumer.
Over the last few years, Coach has gained increasing popularity
in the region - with sales increasing more than 3x in 2010.
Although the
$55 Trefis price estimate for Coach's stock
remains 4% below current market value, we do not see any further
upside from rapid expansion opportunities in China.
The Chinese Opportunity
China offers a tremendous growth opportunity to Coach with a
number of factors playing in its favour:
1. Coach's Low Recognition in China's Huge Luxury Market
The Chinese luxury market grew to $23 billion in 2009 and is
poised to become the largest luxury market in time. While Coach
reported double-digit growth in comparable store sales during
fiscal 2010, increasing its market share to 5%, it is still
not a widely recognized brand in China (with only 8% brand
awareness). This offers a tremendous opportunity for Coach to gain
share in the Chinese luxury market through aggressive and targeted
marketing.
2. Coach's "Accessible" Luxury Brand Image and China's Rising
Middle Class
Coach, in keeping with its Asia-focused strategy, has
positioned itself as an "accessible luxury brand" in China and has
accordingly gained popularity among the rising middle class of
China. With China's middle class estimated to reach 700 million by
2020, making up 48 percent of the nation's population, and its
annual income climbing to an average of $17,700 in the next 10
years (according to Euromonitor International, a market research
firm), the middle class will be the main driver of the luxury
market in China.
Coach has forecasted a 75% year-on-year growth in sales in China
during fiscal 2011 and expects China to surpass Japan as its 2
nd
largest market within 5 years.
Why the Downside Potential?
We have already accounted for the expected growth in number of
Coach China stores (72 by the end of 2011 and 160 by the end of our
forecast period) in our estimate for Coach's stock. However, if
sales in China grow at the pace anticipated by company management
(75% in 2011), it would translate to an estimated 12% increase in
revenue per square feet of Coach China stores in 2011 vs. our
current growth estimate of 20%. This would decrease daily revenue
per Coach China Store from handbags as well as belts, wallets,
wristlets & others. Although the difference does not generate
material downside to our
$55 Trefis price estimate for Coach's stock
, we note that the dramatic growth prospects for the company's
China operations does not yet provide reason for us to raise our
current forecasts.
Drag the trend-line in the chart below to assess the impact
of various handbag revenue per Coach store trends on the
company's stock value.
Our
complete analysis of Coach's stock is here
.