With only a 4% annual increase in sales,
Coach Inc
. (
COH
)reported disappointing Q2 2013 results. The company had achieved
an average y-o-y sales growth of 13.4% in the last four
quarters. Weak performance in the North American market that
accounts for two-thirds of its sales was primarily responsible for
the decline in Coach's top-line growth. North American sales
increased by a mere 1%, with a 2% comparable store sales
decline. Uncertainty around the US fiscal cliff and
Hurricane Sandy led to soft consumer demand despite the holiday
season.
Additionally, while its competitors indulged in intense
promotional activity, Coach was reluctant to offer promotions amid
a season of low demand for luxury products. We believe that as the
macro trends improve, the company can regain growth in its North
American business. With continuous growth in international
markets, an expanding presence in the Men's category and a focus on
growing its internet business, Coach has the potential to grow
sales in the future.
See our complete analysis for Coach
International Business and Men's Category Continue to
Remain Key Growth Segments
International sales, especially in China, and the Men's category
continue to remain the key focus areas as Coach witnessed strong
growth in these segments.
International sales were up by 12% annually with China
witnessing a sharp annual gain of 40% in sales on account
of increased distribution and double-digit same stores growth
in the country. Coach also posted strong growth in other Asian
markets, including Singapore, Taiwan, Malaysia and Korea. However,
Japan recorded a sales decline of 2% on constant currency terms,
and 7% on dollar terms. We believe that as the Chinese economy
recovers, international business will continue to drive growth for
Coach in the future.
Coach also plans to expand in the regions of Europe, Latin
America (including Brazil, Venezuela, Columbia, Panama, Chile and
Peru), other Asia Pacific countries (Australia, Thailand and
Indonesia) and in the Middle East by growing its distributor
business in these regions. We expect this to be a positive trend
for Coach as its traditional markets of North America and Japan are
seeing some saturation.
The Men's business continued to grow at a rapid pace. Coach
claims that it is on track to achieve 50% growth in its Men's
business in 2013. It continues to open more dedicated men's stores
in addition to dual gender stores to tap the growing Men's market
within Asia and North America. We expect the growth in Men's
business to one of the primary growth drivers for the company.
Focus on Digital World to Enhance Revenues
With growing internet usage globally, Coach is focusing on
further developing its internet business to drive growth. Its
online sales channel did well in Q2, which was supported by the
holiday season. In November 2012, Coach alsoopened an e-commerce
website in China to sell its products directly to customers.
Additionally, Coach also recorded a higher percentage of sales
from the mobile channel. As Coach plans to leverage growth in
internet and the mobile platform, we believe growth in alternate
channels will positively impact its business in the long-run.
Expansion within Footwear Market
In its latest earnings call, the company also declared that it
plans to expand in the footwear market by re-launching shoes
in around 170 stores with a diverse range of innovate styles. We
feel the upcoming product innovation will help Coach in building
its global lifestyle brand strategy and will positively impact its
revenues.
Outlook for H2 2013:
- High single-digit growth in sales
- North America comparable stores sales to stay flat as H1
2013
- Gross margin to increase to 73%
- Tax rate to remain around 33%
We are in the process of estimating the price for Coach's
stock.
Understand How a
Company's Products Impact its Stock Price at Trefis