Can This Company Continue Its Stride?

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Coach’s (NYSE: COH) earnings call (sign-in required) on Jan. 23 sent its stock price into a tailspin, plunging 16%. Was the correction warranted? Should investors worry about Coach losing its edge? Coach operates in a highly competitive business where consumer fashion tastes can change like the wind. However, some opportunities for Coach exist in China, with the mobile revolution and through catering to both genders. Here are five takeaways from Coach’s last earnings call:            

1. North American weakness – Coach’s North American sales actually increased 1%; however, its same store sales declined 2%. Coach cited temporary factors such as Hurricane Sandy and consumer nervousness surrounding the fiscal cliff stalemate as catalysts for weakness. Other factors, increasing competitiveness and markdowns, served as the primary reason for the correction on Jan. 23. In the fickle world of fashion consumers gravitate towards the “in” thing.

2. Brutal competition –

<table> <tbody> <tr> <td colspan="7"> <p><strong>Most recent quarter growth</strong></p> </td> </tr> <tr> <td> <p><strong>Company</strong></p> <p><strong> </strong></p> </td> <td> <p><strong>Revenue</strong></p> <p><strong>growth</strong></p> </td> <td> <p><strong>GROSS profit</strong></p> <p><strong>growth</strong></p> </td> <td> <p><strong>Operating income</strong></p> <p><strong>growth</strong></p> </td> <td> <p><strong>Net income</strong></p> <p><strong>growth</strong></p> </td> <td> <p><strong>Cash to   stockholder’s equity</strong></p> </td> <td> <p><strong>Total debt   to equity</strong></p> </td> </tr> <tr> <td> <p><strong>Coach </strong></p> <p><strong>(2<sup>nd</sup> Qtr Released Jan.23)</strong></p> </td> <td> <p>4%</p> </td> <td> <p>4%</p> </td> <td> <p>5%</p> </td> <td> <p>2%</p> </td> <td> <p>41%</p> </td> <td> <p>58%</p> </td> </tr> <tr> <td> <p><strong>*Coach (1<sup>st </sup> Qtr. Released Oct. 23)</strong></p> </td> <td> <p>11%</p> </td> <td> <p>11%</p> </td> <td> <p>3%</p> </td> <td> <p>3%</p> </td> <td> <p>38%</p> </td> <td> <p>58%</p> </td> </tr> <tr> <td> <p><strong>Michael Kors <span class="ticker" data-id="270352">(NYSE: <a href="http://caps.fool.com/Ticker/KORS.aspx">KORS</a>)</span></strong></p> <p><strong>(2<sup>nd</sup> Qtr. Released Nov. 13)</strong></p> </td> <td> <p>74%</p> </td> <td> <p>80%</p> </td> <td> <p>166%</p> </td> <td> <p>141%</p> </td> <td> <p>40%</p> </td> <td> <p>44%</p> </td> </tr> <tr> <td> <p><strong>Fossil <span class="ticker" data-id="203611">(NASDAQ: <a href="http://caps.fool.com/Ticker/FOSL.aspx">FOSL</a>)</span></strong></p> <p><strong>(3<sup>rd</sup> Qtr. Released Nov. 6)</strong></p> </td> <td> <p>6%</p> </td> <td> <p>6%</p> </td> <td> <p>(5%)</p> </td> <td> <p>10%</p> </td> <td> <p>12%</p> </td> <td> <p>27%</p> </td> </tr> <tr> <td> <p><strong>Tiffany (3<sup>rd</sup> Qtr Nov. 29)</strong></p> </td> <td> <p>4%</p> </td> <td> <p>(2%)</p> <p> </p> </td> <td> <p>(20%)</p> </td> <td> <p>(30%)</p> </td> <td> <p>14%</p> </td> <td> <p>80%</p> </td> </tr> <tr> <td> <p><strong>RALPH LAUREN </strong></p> <p><strong>(2<sup>nd</sup> Qtr. Released Nov. 2)</strong></p> </td> <td> <p>(2%)</p> </td> <td> <p>2%</p> </td> <td> <p>(1%)</p> </td> <td> <p>(9%)</p> </td> <td> <p>27%</p> </td> <td> <p>48%</p> </td> </tr> </tbody> </table>

* Added Coach 1st qtr. data to make more comparable to competitors since most haven’t reported this quarter.

Source: SEC documents.

Coach actually stands well competitively (see table above); however, Michael Kors, due to its focus on “lifestyle” wins out in every category with growth in quarterly revenue and gross profit exceeding Coach by a factor of more than eight when compared to similar periods. Kors plowed through Europe with 97% growth in sales. In North America, sales grew 76%. Coach, in a reactionary measure, wants to transform itself into a “lifestyles” company before its fashion begins to fade.

According to its latest earnings call (sign-in required), Kors utilized a number of channels to drive growth. Kors sells its merchandise in Airports and printed catalogs. Leather goods sales grew in the triple digits especially the handbags.

Despite hindrances from hurricane Sandy, Kors still expects revenue growth of 43-50% in fiscal year 2013.

Fossil performed ok in its most recent quarter (sign-in required). Most of Fossil’s revenue growth came from the Asia-Pacific wholesale scene and direct sales segment with 25% and 19% growth respectively giving Coach some competition for that market. However, Fossil missed out on some opportunities to benefit from “colored leather” trends.  Fossil, in reaction to the “lifestyles” trend, is transitioning to a brand driven focus versus a channel or category focus.                                                                                                      

3. Robust growth in China – Coach’s revenue from China grew 40% in the most recent quarter. The growing Chinese middle class turns to the Coach name for accessorizing and looking good. This gives Coach a head start against up and comer Michael Kors who lacks a significant presence there.

4. Mobile driven growth – The convenience of ordering something via an app represents the new frontier in laziness (cough cough) convenience. According to the earnings call, Coach’s related websites grew at a double digit pace thanks to the use of mobile apps. Imagine just sitting somewhere with a smartphone and seeing a wallet on Coach.com that you can’t live without. Simply place the order for pick up or have it sent to your home.

5. Dual gender opportunity – Coach, a brand typically associated with women, faces an excellent opportunity with the male market. Coach estimates its men’s business will grow 50% this fiscal year to about $600 million and this growth opportunity exists all over the globe.

Conclusion

On the whole, Coach needs to remain on guard about its leadership in the “lifestyles” arena. Michael Kors will plow into Coach’s market share with a vengeance. Most of its North American weaknesses remain in the realm of acts of God and politicians. Coach can still capitalize on its opportunities in China, the men’s market and mobile.  As of this writing, Coach pays a dividend of 2.4%, representing about half of its recently reported free cash flow. In the future, it may help to think of Coach as a slow growing dividend play instead of a flaming growth stock.


stockdissector has no position in any stocks mentioned. The Motley Fool recommends Coach and Fossil. The Motley Fool owns shares of Coach and Fossil. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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