Coach on Sale or Still Overpriced?
riddhi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fashion retailer Coach (NYSE: COH) recently released its fourth quarter earnings report. It posted earnings above analyst expectations, but revenue fell short of expectations. The company reported 86 cents per share versus the 85 cents per share estimate and revenues of $1.16 billion versus the $1.2 billion estimate. EPS rose 26.5% while revenue climbed 12% from the same period last year. Coach's revenue has grown during each of the past four quarters on a year-over-year basis. The company's net income for the quarter was $251.4 million. This is 24.2% higher than the year-ago quarter.
The growth
The New York-based company recently launched its Legacy collection of products, tailored for men and women, which is its biggest product launch in many years and is being backed by online, print and outdoor advertising as well as in-store efforts. Coach's international operations continued to perform above pace, with Chinese operations growing more than 60 percent and same-store sales up at a double-digit rate.
With reduced consumer spending, CEO Frankfurt expects decreasing traffic in stores to persist and advised that costs are likely to increase in fiscal 2013, and margins to be crimped. For the quarter, sales grew by 9.8%, which is considerably slower than the annual pace of 14.5%. Coach suspended coupon offerings but customer acceptance of the lower pricing strategy did not gain momentum, forcing Coach to change its stance this quarter. A downbeat growth forecast led to a massive sell-off and the company’s shares went crashing.
Intense Competition
With a 9.5% share, the Hong Kong-based company, Michael Kors (NYSE: KORS) has become a significant threat to Coach’s 35% share of the U.S. handbag market, which Coach has dominated for more than a decade. If Kors meets its own current-year targets, it can gain another 3% share, creating headwinds for Coach’s business.
In addition to Kors, Coach is facing competition from Fifth & Pacific (NYSE: FNP) and Ralph Lauren (NYSE: RL). Both of them have been doing well of late. Fifth & Pacific designs and markets a portfolio of retail-based, premium brands, including Juicy Couture, Kate Spade, and Lucky Brand, which saw same-store sales rise 34% in the latest quarter, which is just phenomenal. Also, Ralph Lauren has been able to grow revenue from $5.7 billion to $6.9 billion and reduce selling, general and administrative costs from 43.1% to 42.5%. As these competitors get more efficient and expand their foothold, Coach would certainly find it difficult to gather breathing space.
Whether to Invest?
The nature of the market is such that stocks will have good days and bad days. It is important to weigh current activity against historical performance when making any investment decisions. Concerned about Coach’s ability to hold on to its market share, investors pushed the stock down by 19% to $49.33, the biggest drop in almost 11 years.
With the expectations that consumers will tighten up on spending, Coach could see profits hurt in the next quarter or so as it will attract buyers with more aggressive pricing. The slowdown exacerbates concern that Coach might be losing market share in the U.S. The threat of a fast growing competitor in Michael Kors is no longer just a threat; it’s becoming apparent in performance.
On a positive note, the company is projecting $250 million in capital expenditures during FY13 which seems to bring tremendous growth opportunities. Earnings growth in the past year is holding steady compared to earnings growth in the past three years. Coach gives a dividend yield of 2.10%. The most recent quarterly earnings report was approximately equal to or higher than analysts’ consensus forecast, but not to a degree that is predictive of future returns. Furthermore, Coach will continue to grow from distribution gains, primarily in North America, China, and Western Europe. For these reasons, I suspect the next quarter’s numbers could be a bit weaker, but long term investors need not worry as long as the strategic direction is on track.
Riddhi2406 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.
