SWOT's The Matter?

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Coach (NYSE: COH) just reported Q1 earnings with revenues up 10.4% and strong comps both in Asia and the US so it's time for a little checkup as to current strengths, weaknesses, opportunities and threats. Coach manufactures and sells men's and women's accessories, shoes, apparel, eyewear, jewelry and fragrance mainly in the US and Asia. It also licenses its brand to manufacturers. It trades at a 16.16 P/E and has a 2.20% yield.

STRENGTHS

  • Coach has been vigorously defending its brand and trademarks since 2009 in an initiative called "Operation Turnlock." They just recently won a judgment of $257 million against counterfeiters in federal court in Chicago. They're not afraid to go up against international rings down to flea market vendors.  In July Coach won a $44 million verdict in New York against a mother-daughter team who ran a website which sold counterfeit Coach.
  •  Chairman and CEO Lew Frankfort owns over 2,066,449 shares. Just try prying them from his hands. CEO's that have been with the same company over two decades are ones you can bank on.  He brought it from a small cottage industry of leather artisans to the multi-billion dollar company it is now.
  • The company is bringing back its Legacy collection of purses as well as expanding more into apparel, i.e their puffer jacket, already popular and one of Oprah's Favorite Things.
  • The company has a strong presence in Asia with 180 stores in Japan, 96 in Hong Kong, Macau and mainland China, and 34 in Taiwan and Singapore and just expanded to Korea and Malaysia. Sales in Asia, mostly China,rose 40%  in this last quarter and 60% the quarter before. They have 17% of market share in Japan.
  • The company only has $23.26 million in debt to cash of $760.76 million. The company's margins are well above average with an operating margin at 31%.
  • The company is a consistent dividend raiser with a payout ratio of 22% and has been buying back stock since 2007.

WEAKNESSES

  • Earnings from quarter to quarter are inconsistent. The stock plunged after its earnings release in July reported weaker sales in the US. But the quarter before that earnings rose 21% with great numbers from the US and China.
  • Coach is in the high-end retail sector and is a discretionary name that obviously works better when the economy is thriving. Part of the reason for the earnings plunge in July was mistakenly withdrawing the use of coupons at the outlet stores. Women still want the aspirational accessories but they expect a bargain if they have to go out of their way to the Coach outlet store.
  • Slowness over the years to expand the lines and markets while still keeping their classic customers. It should have brought back the Legacy Collection sooner.
  • Labor costs in China have risen but Coach is actively seeking new areas for its manufacturing to keep costs down.

OPPORTUNITIES

  • Coach should expand its apparel lines even further while still maintaining the integrity of the brand.
  • Coach should explore more licensing opportunities. They already license the name for multiple accessories, but if they could find more unique and up-and-coming style designers they could keep some excitement in the brand. Already they have commissioned renowned designer Anna Sui to design two limited edition totes.
  • Why limit themselves to the US and Asia? There's Latin America and Canada available to expand their markets. While they may not want to move into Europe immediately, there's no reason they can't import the brand to the capitals, Rome, London, Paris, Madrid, Copenhagen, etc. And what about Dubai?
  • If Coach were to expand to Europe and other countries where men are more in the habit of using men's accessories, this could be a modest driver of growth. Seriously, they need to make the men's line of products more acceptable in the US.
  • Beef up their e-tail presence, it's not bad but some retailers like Victoria's Secret, lululemon, and Urban Outfittters have got it down to a science while still looking like art.

THREATS

  • Increased competition from Michael Kors Holdings Ltd (NYSE: KORS) is a constant threat as their accessories and licensed accessories are big moneymakers. The two companies are seen as direct competitors and in some department stores their wares are placed next to each other, just as if they were Pepsi and Coke at the grocery store. Coach needs to distance and differentiate itself from Michael Kors products.
  • Counterfeiting is a constant threat when you have a popular, pricey brand. As said before Coach vigorously defends its trademark wherever and whenever.
  • Michael Kors and Ralph Lauren Corporation both play in Europe and Coach could be too late to the party as the European economy slowly recovers.
  • Succession plans for CEO Lew Frankfort who's been at the helm for almost 30 years now even when they were a tiny division of Sara Lee, yes the dessert company, that Sara Lee.

THE TAKEAWAY

Overall, Coach has been addressing its threats. Maybe it isn't taking enough of a chance by staying only in the US and Asia but it's expanding in China with 30 stores a year, without huge debt and still managing to repurchase shares and raise dividends. Quite a hat trick, I'd say. Also, downticks in Asian economies, particularly in China will always impact this name. Otherwise, I can't think of four other companies with this much going for it.


leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach. Motley Fool newsletter services recommend Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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