We retained our Neutral recommendation on Coach, Inc. (COH - Analyst Report) with a target price of $60.00. The stock carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Being a leading American marketer of fine accessories and gifts, Coach boasts a proven strategy of investing in stores to enhance store sales productivity through product innovation, compelling pricing strategy, new merchandise assortments and a cost-effective global sourcing model, which we believe should help drive top and bottom-line growth. This was well reflected in the company’s third-quarter fiscal 2013 results, wherein top line rose 7% and bottom line increased 9%.
The company remains optimistic about its dual-gender Legacy lifestyle collection, dedicated men's stores and international growth opportunities to counter the soft consumer scenario. The company is also aggressively expanding its e-commerce platform. Management expects to attain more than $600 million in sales worldwide from its Men’s business and at least $425 million in sales in China in fiscal 2013.
Coach maintains a healthy balance sheet with a significant cash balance and a negligible debt load. The company also has been actively managing its cash flows by generating significant free cash, making prudent capital investments and enhancing shareholders return. The company’s strong liquidity positions it to drive future growth.
Store expansion strategy also remains on cards for Coach. Management projects square footage growth of about 10% to 11% during fiscal 2013. With a mature domestic market and difficult consumer spending environment, as evident from flat comparable-store sales forecast for the fourth quarter for North America, the company is seeking opportunities internationally.
Moreover, what remains a matter of concern for Coach is fashion obsolescence. The company’s pioneering position may be compromised by delays in its product launches. The company operates in the highly competitive premium handbag and accessories segment. The company faces stiff competition from European luxury brands as well as private label retailers on distinctiveness, innovativeness, quality and pricing, which will likely continue to weigh on its results.
Stocks Worth Considering
Stocks worth considering in the textile, apparel industry are G-III Apparel Group, Ltd. (GIII - Snapshot Report), Hanesbrands Inc. (HBI - Analyst Report) and Michael Kors Holdings Limited (KORS - Analyst Report), all of which hold a Zacks Rank #2 (Buy). The stocks are expected to continue with their upbeat performances and sustain their positive earnings surprise trend.