Coach (
COH
) is a leading American marketer of luxury lifestyle handbags
and other fashion accessories for both men and women. The firm
competes with other premium apparel and accessories players
like Polo Ralph Lauren (
RL
), Liz Claiborne (
LIZ
), and AnnTaylor (
ANN
), as well as high-end brands like Louis Vuitton, Hermes,
Gucci and Prada.
The handbags division is the most valuable segment for Coach
contributing more than 50% to the stock value. However, Coach's
handbags profit margin has been declining consistently from a
historical high of above 40% in 2007. The decrease was a result of
a combination of factors: promotional activities and price
reduction to induce consumer spending during the recession, higher
expenses from Coach-operated stores in North America, Japan and
China, and a declining proportion of department stores & other
retailers in Coach's total handbags revenues.
We believe the above factors will continue to affect Coach's
sales in the coming years. While we anticipate Coach's handbags
EBITDA margin will decline to 32% by the end of Trefis forecast
period, Trefis members expect a smaller decline in the margin,
reaching 34%. The member estimates imply an upside of 4% to our
price estimate for COH stock.
We currently have a
Trefis price estimate of $57.04 for Coach's
stock
, ahead of the market price of around $53.
Higher
Revenue Share for Coach Stores than Department
Stores
Coach is focusing on improving its store revenues (as a
percentage of sales) as this channel provides greater control over
its business. We expect Coach store handbag revenues (as percentage
of total division revenues) will continue to increase though at a
slower rate than historically as Coach continues to lay emphasis on
its own run stores. Since EBITDA margins for Coach-operated stores
are significantly lower than margins for department stores &
other retailers, an increase in Coach store division revenues (as a
percentage of total division revenues) will lead to a decline in
handbags EBITDA margin.
Higher Factory Outlet Sales, Rising Costs
In Q2 2011, Coach's profits increased 26% over Q1, but its
margins fell as Coach relied more on its factory outlets channels
that typically have lower margins than full-priced stores. Rising
labor costs in China are also weighing on the company.
Coach announced plans to move part of its production from China
to relatively cheaper destinations like India and Vietnam and is
trying hard to drive more sales in order to offset declining
margins. Coach reduced the average handbag price by about 10% to
induce demand during the economic downturn. The company is
expanding its presence in emerging markets like China which has
seen double-digit growth where the company expects its China sales
to rise to $500 million by the of 2014.
Our
complete analysis for Coach's stock is here
.