Shares of Coach, Inc. have fallen over 15% in a month and also underperformed the industry‘s decline of 1.8%. This fact alone is enough to unnerve investors but the question is what is bothering this Zacks Rank #3 (Hold) stock, which otherwise looks quite disciplined in its approach to the changing retail landscape. Further, VGM Score of A and long-term earnings per share growth rate of 11.1%, clearly indicate the stock’s inherent potential.
Why Is the Stock Struggling?
We noticed that shares of Coach came under pressure after the company reported fourth-quarter fiscal 2017 results on Aug 15. Analysts pointed that investors were not impressed by the disappointing top-line performance and not so encouraging outlook in spite of integration of Kate Spade & Company.
After declining 4% during the third quarter of fiscal 2017, net sales tumbled 1.8% in the final quarter. Moreover, we also noted that the total sales of $1,133.8 million fell short of the Zacks Consensus Estimate of $1,146 million for the fourth successive quarter. Sales growth were hurt by 60 basis points due to management’s efforts to elevate the Coach brand’s positioning in the North American wholesale channel by lowering promotional events and door closures. The company now envisions fiscal 2018 earnings in the range of $2.35-$2.40 per share.
Sluggish mall traffic, increased online competition and aggressive pricing strategy are headwinds with which the industry is grappling. We note that the Zacks Consensus Estimate of $2.36 and $2.65 for fiscal 2018 and 2019 has declined by 5 cents and 6 cents, respectively, in the past 30 days. Moreover, the same has plunged 14 cents to 36 cents for the first quarter of fiscal 2018.
What Are the Tailwinds?
As one of the leading American marketers of fine accessories and gifts, Coach boasts a proven strategy of investing in stores to enhance sales output through product innovation, compelling pricing strategy, new merchandise assortments and cost-effective global sourcing model. We believe that these strategies will help drive comparable-store sales and operating margins in the long term. The company’s growth drivers include expansion of global distribution model and venturing into under-penetrated markets.
Coach is undergoing a brand transformation and introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman has been accretive to performance and is being viewed as a significant step in its efforts toward becoming a multi-brand company. The recent agreement to acquire to Kate Spade & Company for $2.4 billion is another step taken in that direction. Additionally, it is aggressively expanding e-Commerce platform.
Strategic endeavors along with transformational initiatives are expected to facilitate the company to attain operating income growth of 22-25% backed by mid-single digit organic growth, Kate Spade buyout and estimated synergies of $30-$35 million.
3 Retail Stocks Taking the Limelight
If you are interested in the retail space you can consider stocks such as G-III Apparel Group, Ltd. (GIII - Free Report) flaunting a Zacks Rank #1 (Strong Buy), and PVH Corp. (PVH - Free Report) and The Children's Place, Inc. (PLCE - Free Report) both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
G-III Apparel delivered an average positive earnings surprise of 3.5% in the trailing four quarters and has a long-term earnings growth rate of 15%.
PVH Corp. delivered an average positive earnings surprise of 3.6% in the trailing four quarters and has a long-term earnings growth rate of 12.6%.
Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters and has a long-term earnings growth rate of 9%.
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