We reiterated our long-term Underperform recommendation on Coach, Inc. with a target price of $50.00.
Why the Reiteration?
Coach sells products that are largely discretionary in nature and thereby depend upon consumers’ disposable income. Consumers in turn are highly sensitive to macroeconomic factors. Given the difficult consumer spending environment in the past couple of quarters, things have become a little difficult for Coach, as was evident in its last quarterly performance.
Coach reported first-quarter fiscal 2014 results on Oct 22, 2013. The performance was disappointing on the sales front, which fell 1% to $1,150.8 million, after rising 6% during fourth-quarter fiscal 2013. The decrease was due to softness in the North American market.
Net sales also fell short of the Zacks Consensus Estimate of $1,191 million. The bottom line also failed to impress investors, as it remained flat at 77 cents per share compared with the prior-year quarter and the Zacks Consensus Estimate.
Fashion obsolescence is another factor that remains a major concern for Coach’s business model, which involves a sustained focus on product and design innovation. The company’s pioneer position could be affected by delays in product launches. It is noteworthy that the company operates in the highly competitive premium handbag and accessories segment.
Estimates for Coach have shown a downtrend for quite some time with analysts becoming less constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that fell 8.9% to $3.47 for fiscal 2014 and 10.1% to $3.81 per share for fiscal 2015 in the past 90 days.
However, prudent measures taken by Coach such as store expansion plans, compelling pricing strategy, new merchandise assortments and a cost-effective global sourcing model can steadily improve the operational performance of this Zacks Rank #4 (Sell) stock in the future. Nevertheless, we believe that given the absence of near-term growth catalysts and sluggish economic recovery, Coach’s performance is likely to remain strained in the near future.
Other Stocks to Consider
Not all retail stocks are performing as disappointingly as Coach. Other stocks worth considering in the retail sector include G-III Apparel Group, Ltd. (GIII - Free Report) , Columbia Sportswear Co. (COLM - Free Report) and Michael Kors Holdings Ltd. (KORS - Free Report) . While G-III Apparel carries a Zacks Rank #1 (Strong Buy), Columbia Sports and Michael Kors have a Zacks Rank #2 (Buy).