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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 the top and bottom line in fiscal 2013. 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 emerging markets, such as Vietnam, Indonesia, Brazil, Venezuela, Colombia, Panama, Chile, Peru and Kuwait to bolster its popularity.  

Management achieved more than $300 million in sales in China during fiscal 2012, and expects to achieve at least $400 million in sales in fiscal 2013. As a part of its strategy to directly control certain Asian markets, Coach is now directly operating domestic retail businesses in Singapore and Taiwan. The company is under discussion to acquire Malaysian domestic business and Korean retail business in the first quarter of 2013.

Coach maintains a healthy balance sheet with significant cash balance and negligible debt load. Also, the company 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 ended the fourth quarter of 2012 with cash, cash equivalents and short-term investments of $917.2 million and total long-term debt of $23.4 million. Coach also notified that it bought back approximately 2.5 million shares at a cost of $67.79 per share, aggregating $169 million, and generated free cash flow of $210 million during the quarter.

Impressive Results

Amidst sluggish recovery in the economy, Coach posted fourth-quarter 2012 earnings of 86 cents a share that beat the Zacks Consensus Estimate by a penny, and increased 27% from 68 cents earned in the prior-year quarter, buoyed by healthy top-line growth on the back of strong sales in China.

Coach, said that net sales for the quarter came in at $1,155.2 million, up 12% from the year-ago quarter, but below the Zacks Consensus Estimate of $1,197 million.

The rise in sales was a positive indication for the luxury-goods market, which was battered by the recent economic upheaval. Coach’s sustained focus on store sales productivity, online sales initiatives, merchandising, marketing and strategic pricing have helped it remain afloat in a difficult consumer environment. The company remains optimistic about its unisex Legacy lifestyle collection, dedicated Men's stores and international growth opportunities to counter the soft consumer scenario in North America and dull economic environment.

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 the main concern for Coach’s business model, which requires sustained focus on product and design innovation. The company’s pioneer 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 $63.00. However, Coach, which competes with Ralph Lauren Corporation (RL - Analyst Report), holds a Zacks #4 Rank that translates into a short-term Sell rating.

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