Coach Inc.
(
COH
), the leading American marketer of luxury lifestyle handbags and
other fashion accessories, has reportedly witnessed an increase in
sales of its fancier handbags (priced over $400) driven by a rise
in luxury spending. The firm competes with with other premium
apparel and accessories players like Polo Ralph Lauren (NYSE:RL),
Liz Claiborne (NYSE:LIZ) and
Ann
(
ANN
).
We estimate that handbags are the most important product for
Coach, contributing almost 57% of our
$57.49 price estimate for the company's stock
. Our price estimate is roughly in line with market price.
Increased Global Consumer Confidence Boosting Luxury
Sales
With the economy recoverying from the recession of 2008-09,
global consumer confidence is on the rise and is positively
impacting the luxury retail market so much so that many luxury
goods makers now expect 2011 to be one of their strongest years in
recent history. Another reason for this optimism is the
fast-growth in China, which is soon expected to become the largest
luxury market in the world.
This trend is benefiting luxury brands like Coach, as consumers
are still seeking bargains and opting for affordable products over
items offered by higher-end rivals. Coach in its Q3 FY11 results
reported that bags over $400 accounted for about 18 percent of its
sales, up from 10 percent a year earlier. The shift to fancier bags
effectively raises Coach's average bag price to about $300, from
about $288 during the recession after it launched the lower-priced
Poppy line. This is likely to provide a boost to Coach's top
line resulting in an increase in daily handbag revenue per Coach
store.
Higher Priced Handbags Sales Will Help Curb Margin
Contraction from Rising Production Costs
A rise in sales of higher priced Coach handbags is good news for
the "affordable luxury" retailer which has been facing a rise in
labor costs in China and now plans to shift production to countries
with lower production costs. Higher average pricing of
handbags is likely to help Coach retain its high margin, one of the
highest in the apparel and accessories industry, by deleveraging
rising production costs.
We currently forecast that Coach's handbags' EBITDA margin will
decline in 2011-12 before flattening out. However, if Coach manages
to maintain its margin at current levels as a result of the better
mix of higher priced products, there could be upside of about 6% to
our $57.49 price estimate for Coach stock.
See our full analysis of Coach stock here