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Despite lingering economic woes, Coach, Inc. ( COH - Analyst Report ) , the designer and marketer of fine accessories and gifts, recently posted better-than-expected second-quarter 2012 results on the back of healthy sales in North America and China.
Street analysts had enough time to ponder over the company’s scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.
Last Quarter Synopsis
New York-based Coach unveiled its second quarter financial results on January 24. The quarterly earnings of $1.18 per share beat the Zacks Consensus Estimate of $1.15, and increased 18% from $1.00 earned in the prior-year quarter buoyed by strong top-line growth.
Coach said that net sales for the quarter came in at $1,448.6 million, up 14.6% from the year-ago quarter, and outpaced the Zacks Consensus Estimate of $1,430 million.
Direct-to-consumer sales jumped 17% to $1.28 billion driven by an 8.8% rise in the North American comparable-store sales and strong growth in the China business with a double-digit rate increase in comparable-store sales. Indirect sales remained flat at $166 million on a comparable basis, affected by the timing of international shipments.
The rise in sales was a positive indication for the luxury-goods market, battered by the recent economic upheaval. Management remains confident of sustaining double-digit growth in both top and bottom lines in fiscal 2012.
(Read our full coverage on this earnings report: Coach Beats on Both Edges)
Agreement of Estimate Revisions
The agreement of estimate revisions indicates that the majority of the analysts were unidirectional following Coach’s second-quarter 2012 results.
In the last 7 days, 10 out of 21 analysts covering the stock raised their estimates, whereas only 1 analyst lowered the same for the third quarter of 2012. For the fourth quarter, 8 analysts revised their estimates upwards and 3 made downward revisions.
For fiscal 2012, 18 analysts moved their estimates up, with none lowering the same in the last 7 days. For fiscal 2013, 16 analysts increased their estimates and only 1 analyst trimmed the same.
What Drives Estimate Revision?
Clearly, a positive sentiment is palpable among analysts, who remain optimistic on Coach’s performance. Following the earnings release, the Zacks Consensus Estimate has been on the rise with the majority of the analysts remaining bullish on the stock. The better-than-expected results and a double-digit growth forecast in sales and earnings bolstered analysts’ confidence, who tweaked their estimates to better align with management’s projections.
Further, analysts were impressed by the company’s dedicated men's stores. Coach remains optimistic about its men's stores, and expects this business to rise twofold to more than $400 million in fiscal 2012 on a global basis. Management’s projection of achieving at least $300 million in sales in China, backed by sustained growth momentum, also encouraged the analysts, who went on to revise their estimates upwards. However, the turbulent economic environment still remains a matter of concern.
Magnitude of Estimate Revisions
The magnitude of estimate revisions by the analysts is clearly reflected through changes in the Zacks Consensus Estimates.
The Zacks Consensus Estimates moved up by a couple of cents to 75 cents for the third quarter of 2012, and by a penny to 85 cents for the fourth quarter, in the last 7 days.
For fiscal 2012, the Zacks Consensus Estimates rose 4 cents to $3.50 in the last 7 days. For fiscal 2013, the Zacks Consensus Estimates jumped 6 cents to $4.07.
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.
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 promising markets, such as China, Brazil, Vietnam and Kuwait to increase its brand awareness.
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.
Coach 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 a 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. 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.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
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