Coach Walks the Tightrope - Analyst Blog

Being a leading American marketer of fine accessories and gifts, Coach Inc. ( COH ) boasts a proven strategy of investing in stores to enhance sales productivity through product innovation, compelling pricing strategy, new merchandise assortments and a cost-effective global sourcing model. This strategy should drive comparable-store sales and operating margins in the long term.

Management remains confident of sustaining a double-digit growth momentum in both the top and bottom lines, after posting better-than-expected first-quarter 2012 results on the back of healthy sales in North America and China.

The quarterly earnings of 73 cents per share beat the Zacks Consensus Estimate of 70 cents and jumped 15.9% from 63 cents in the prior-year quarter, buoyed by strong top-line growth. Coach said that total net sales for the quarter came in at $1,050.4 million, up 15.2% from the year-ago quarter and above the Zacks Consensus Estimate of $1,023 million.

The company's long-term growth drivers include the expansion of its global distribution model and its movement into under-penetrated markets. After North America and Asia, Coach also extended its global footprint in Europe. It is also investing in rapidly-growing emerging markets, such as China, Brazil and Vietnam to increase its brand awareness. The company continues to open new dedicated men's stores and gain market share in North America.

Coach maintains a healthy balance sheet with significant cash balance and negligible debt load. The company also has been proactively managing its cash flows by making prudent capital investments and enhancing shareholders' return. The company's strong liquidity positions it well to drive future growth.

The company ended the first quarter with cash, cash equivalents and short-term investments of $848 million and total long-term debt of $24.1 million with shareholders' equity of $1,816.5 million. Coach generated a free cash flow of $194 million during the quarter, and incurred capital expenditures of $31 million.

Coach also bought back approximately 1.1 million shares at a cost of $55.30 per share, aggregating $59 million during the quarter. The company still has $900 million at its disposal under its share repurchase authorization.

Coach sells products that are discretionary in nature. Its customers remain sensitive to macroeconomic factors including interest rate hikes, increases in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending, and in turn the company's growth and profitability. Therefore, we remain concerned about erratic consumer behavior and sluggish recovery in the economy.

Fashion obsolescence remains the main concern for Coach's business model, which requires sustained focus on product and design innovation. The company's pioneering position may be compromised by delays in its product launches.

Given the pros and cons, we prefer to have a long-term 'Neutral' recommendation on the stock with a price target of $64.00. However, Coach, which competes with Polo Ralph Lauren Corporation ( RL ), holds a Zacks #2 Rank that translates into a short-term 'Buy' rating, and reflects the company's optimistic attitude of accomplishing double-digit growth in both top and bottom lines going forward.

COACH INC ( COH ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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