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Freefall for Coach Shares, Future Looks Bleak

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Troubles for luxury retailer, Coach, Inc. seem far from over. Yesterday at the investors’ day conference, the company announced 70 store closures and projected a double digit dip in its revenues for fiscal 2015. This triggered a massive sell off leading to 9% erosion of market cap.  Year to date stock price has fallen over 35%.

Moreover, Coach expects same store sales in North America to decline in high-teens in the fiscal. Meanwhile, operating margins are expected to be around high teens as the company increases investments across board.

Coach has been in troubled waters for quite sometime now. Fashion obsolescence remains a major concern for Coach’s business model, which involves a sustained focus on product and design innovation. It is a chilling reminder of what happens when consumer preference change drastically and company fails to keep up with the changing trends.

Moreover, emergence of other big names like Michael Kors Holdings Limited (KORS - Free Report) and Kate Spade & Company in the premium handbags market has taken a lot of business away from Coach.

Recently, Coach posted third-quarter fiscal 2014 earnings of 68 cents a share that beat the Zacks Consensus Estimate of 63 cents but tumbled 19% from 84 cents delivered in the prior-year quarter.

Moreover, net sales for the quarter came in at $1,099.6 million, down about 7% from the year-ago quarter and also fell short of the Zacks Consensus Estimate of $1,134 million due to softness in the North American market. On a constant currency basis, sales decreased 5%.

To improve its performance, the company has resorted to vigorous international and online expansion, utilizing the opportunities in the growing men’s accessory category and lastly, restructuring the domestic operations by new product launches. Moreover, the company will cut back on discounts and flash sales in favor of a semi annual sale.

On the international front, China might provide the much needed relief as Coach expects sales to grow substantially in the next five years.

We believe that things might get worse for Coach before they get better. However, we would like to label Coach as a wait and see story.

Currently, Coach carries a Zacks Rank #3 (Hold). Another retailer worth consideration includes Hanesbrands Inc. (HBI - Free Report) , which sports a Zacks Rank #2 (Buy).

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