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Earnings Preview: Coach

COH RL

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Coach, Inc. (COH - Analyst Report), the designer and marketer of fine accessories and gifts, is slated to report its second-quarter 2012 financial results on January 24, 2012. The current Zacks Consensus Estimate for the quarter is $1.15 per share. The Zacks Consensus estimates revenue at $1,430 million.

First-Quarter 2012, a Synopsis

Despite economic woes, Coach posted better-than-expected first-quarter 2012 results on the heels of healthy sales in North America and China. The quarterly earnings of 73 cents a share beat the Zacks Consensus Estimate of 70 cents, and jumped 15.9% from 63 cents earned in the prior-year quarter buoyed by strong top-line growth.

The New York based 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 outdid the Zacks Consensus Estimate of $1,023 million.

Second-Quarter 2012 Zacks Consensus

The analysts considered by Zacks, expect Coach to post second-quarter 2012 earnings of $1.15 per share. The current Zacks Consensus Estimate reflects a growth of 15% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between $1.11 and $1.17.

Zacks Agreement & Magnitude

Of the 20 analysts following the stock, none of the analysts revisited their estimates in the last 7 or 30 days, thereby keeping the Zacks Consensus Estimate unchanged.

Positive Earnings Surprise History

With respect to earnings surprises, Coach has topped the Zacks Consensus Estimate over the last four quarters in the range of 3.1% to 4.6%. The average remained at 3.8%. This suggests that Coach has outperformed the Zacks Consensus Estimate by an average of 3.8% in the trailing four quarters.

Price Stats

Since its last earnings release on October 25, 2011, Coach’s market price has increased 6% to $65.00 as of January 19, 2012. During trading hours on January 19, the stock reached the day low of $64.59 and the day high of $65.49.

The stock price is within the range of the 52-week low-high range of $45.70 attained on August 19, 2011 and $69.20 achieved on July 7, 2011. From October 25, 2011 to January 19, 2012, the stock dropped to a low of $56.72 on December 19, 2011 and rose to a high of $66.54 on October 28, 2011.

Coach in Neutral Lane

Being a leading American marketer of fine accessories and gifts, Coach boasts of 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, which should drive comparable-store sales and operating margins in the long term.

Management remains confident of sustaining a double-digit growth momentum in both 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 company’s long-term growth drivers include the expansion of its global distribution model and venture 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 sells products that are discretionary in nature. Its customers remain sensitive to macroeconomic factors including interest rate hikes, increase 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 also 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. However, Coach, which competes with Polo Ralph Lauren Corporation (RL - Analyst Report), 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.

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