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Earnings Preview: Coach

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Coach, Inc., the designer and marketer of fine accessories and gifts and an S&P 500 company, is slated to report its fourth-quarter and fiscal 2012 financial results on July 30, 2012.

The current Zacks Consensus Estimate of 85 cents a share for the quarter reflects year-over-year growth of 25%. The estimates in the current Zacks Consensus range between a low of 82 cent and a high of 88 cents a share. The Zacks Consensus revenue estimate stands at $1,199 million for the fourth quarter.

Third Quarter Recap

Coach posted better-than-expected third-quarter 2012 results. 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.

The New York based company reported net sales of $1,109 million in the quarter, up 16.6% year over year and ahead of the Zacks Consensus Estimate of $1,101 million.

Coach remains optimistic about its dedicated men's stores, and expects the Men’s business to increase two fold to more than $400 million in fiscal 2012 on a global basis. Moreover, management remains confident of sustaining double-digit growth in both top and bottom lines in fiscal 2012.

(Refer the article: Coach Beats, Ups Dividend)

Zacks Agreement & Magnitude

For fourth-quarter 2012, out of 21 estimates, one estimate was revised downwards over the last 7 and 30 days, whereas no upward revisions were noticed. For the fiscal year 2012, one estimate (out of 23) was lowered with no upward revision in the last 7 days. In the last 30 days, one estimate went up while two were trimmed.

For the to-be-reported quarter, the estimate remained constant at 85 cents over the last 7 and 30 days.

Positive Earnings Surprise History

With respect to earnings surprises, Coach has topped the Zacks Consensus Estimates over the last four quarters in the range of a low of 2.6% to a high of 4.6%, with the average at 3.6%. This implies that Coach has outperformed the Zacks Estimates by the same magnitude over the last four quarters and we believe that the company will continue to post better-than-expected results in the coming quarters.

Neutral on Coach

Coach boasts 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.

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.

Coach maintains a healthy balance sheet with a 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.

However, 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 a 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.

Coach, which competes with Polo Ralph Lauren Corporation (RL - Free Report) , carries Zacks #3 Rank, implying short-term Hold rating for the next 1-3 months. We maintain our long-term Neutral recommendation on the stock.

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