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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, and an S&P 500 company is slated to report its third-quarter 2012 financial results on April 24, 2012.

The current Zacks Consensus Estimate for the quarter is 75 cents a share, which reflects a growth of 21% from the prior-year quarter’s earnings. The estimates in the current Zacks Consensus range between a low of 73 cent and a high of 76 cents a share. The Zacks Consensus estimates revenue at $1,100 million for the first quarter.

Recap of Second-Quarter 2012

On January 24, 2012, Coach delivered second-quarter 2012 results. Despite lingering economic woes, Coach posted better-than-expected results on the back of healthy sales in North America and China. 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.

The New York based company, 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.

(Refer the article: Coach Beats on Both Edges)

Zacks Agreement & Magnitude

No movement was noticed in the Zacks Consensus Estimate for the third quarter of 2012, either in the last 7 or 30 days, since 22 analysts covering the stock kept their estimates intact, in the absence of any major news having a direct or an indirect impact on the estimates. 

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 2.6% to 4.6%. The average remained at 3.7%. This suggests that Coach has outperformed the Zacks Consensus Estimate by an average of 3.7% in the trailing four quarters. Given the past performance we expect the company to outperform the Zacks Consensus Estimate this time too.

Price Stats

Since its last earnings release on January 24, 2012, Coach’s market price has increased 10.4% to $74.83 as of April 19, 2012. During trading hours on April 19, the stock reached an intra-day low of $74.25 and an intra-day high of $76.19. The stock price is within the range of the 52-week low-high range of $45.70 attained on August 19, 2011 and $79.70 achieved on March 27, 2012. From January 24 to April 19, 2012, the stock dropped to a low of $65.80 on January 24, 2012 and rose to a high of $79.70 on March 27, 2012.

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 double-digit growth in both top and bottom lines in fiscal 2012. The company’s long-term growth drivers include expansion of its global distribution model and entry into under-penetrated markets. The company lays more emphasis on globalization and accelerated international distribution growth.

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, Vietnam and Kuwait to increase its brand awareness.

Management now expects to achieve at least $300 million in sales in fiscal 2012 in China, backed by the sustained growth momentum it is currently witnessing. As a part of its strategy to directly control certain Asian markets, Coach is now directly operating its retail business in Singapore and Taiwan. The company is also under discussion to acquire its Malaysian retail business in July.

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 shareholder returns. 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 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. 

Currently, we maintain our 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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