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Analyst Blog

Being a leading American marketer of fine accessories and gifts, Coach Inc. (COH - Analyst Report) 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.Moreover, the company has entered into a deal to take charge of its Korean retail business in early fiscal 2013.

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.

Efforts Reaping in Healthy Results

Despite sluggish recovery in the economy, Coach posted better-than-expected third-quarter 2012 results on the back of healthy sales in North America and China. Strong brand image, geographical expansion, and new pricing and promotional policies in North American factory business were also the factors behind the growth.

The quarterly earnings of 77 cents a share beat the Zacks Consensus Estimate by a couple of cents, and increased 24% from 62 cents earned in the prior-year quarter buoyed by strong top-line growth. Coach said that net sales for the quarter came in at $1,109 million, up 16.6% from the year-ago quarter, and ahead of the Zacks Consensus Estimate of $1,101 million.

The rise in sales was a positive indication for the luxury-goods market, battered by the recent economic upheaval. Coach’s sustained focus on store sales productivity, merchandising, and marketing and strategic pricing have helped it remain afloat in a difficult consumer environment as well as drive comparable-store sales growth.

Coach remains optimistic about its dedicated Men's stores, and expects the Men’s business to rise twofold to more than $400 million in fiscal 2012 on a global basis. Management aims to enhance Men’s collections in 100 retail stores in North America by the end of fiscal 2012, up from 42 at the end of the third quarter.

Concerns

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 sluggish recovery in the economy.

Fashion obsolescence remains another 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. 

Closing Commentary

Given the pros and cons, we prefer to have a long-term ‘Neutral’ recommendation on the stock with a price target of $65.00. 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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