Coach (
COH
) is a leading American marketer of luxury lifestyle handbags
and other fashion accessories for both men and women. It is one of
the most well-known accessories brands in the U.S. and also
maintains a presence in select international markets. Coach
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.
We have previously discussed the potential upside to Coach from
expansion in China and the increasing popularity of its "affordable
luxury" brand image. (see
Could Coach Replicate its Japanese Market Success
in China?
) However, Coach's shares sold off post earnings even as Coach beat
expectations, largely because gross margin remained flat and failed
to meet expectations. It seems that the market is not ready to pay
more for Coach right now.
We maintain a
$57.04 price estimate for Coach
, in line with market price, but identify a few factors below that
could be giving investors second thoughts.
See our full analysis and $57.04 price estimate
for Coach
1. Commodity Costs on the Rise
Coach is planning to shift production outside of China to places
like Vietnam and India as production costs in China increase due to
a rise in labor costs. The move indicates Coach's concerns over
erosion to profit margins.
While shifting production to new regions might help Coach cut
down on production costs going forward, the initial expenditure
required to set-up production capabilities or establish ties with
manufactures could pose a near-term headwind to profit margins.
The firm plans to have half of its handbags and accessories made
outside of China in the next 4 -5 years and this could mean a
significant increase in the firm's capital expenditures in the
years ahead. We estimate a 1% increase in Coach's capital
expenditure as a percent of revenues in 2011 could result in a 3%
downside to the company's stock value.
2. Targeting a Wider Consumer Base Could Cause Brand
Deterioration
Coach has been pushing into emerging markets and aiming to
appeal to a wider audience by marketing itself as an "affordable
luxury" brand. The firm even lowered the company's average handbag
price by about 10% to boost demand during the economic
downturn. While this has contributed to Coach's popularity and
helped lift the firm's revenue during times of economic
uncertainty, the prolonged effect could be less exclusivity and,
consequently, lower branding power in the future. The consumer
markets in which Coach operates are heavily influenced by the
concepts of style and exclusivity.
The result could drive high-end consumers to look elsewhere for
exclusivity, hurting Coach's sales and reducing its profit
margins.
The interactive charts above showcase the affect of various
EBITDA margin and capital expenditure scenarios on Coach's stock
value.