Coach Quarterly Results Disappoint Due To Weak N. American Performance
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.
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.