TPR Tapestry Inc

Despite the economic instability, Coach, Inc. (COH), the designer and marketer of fine accessories and gifts, recently posted better-than-expected first-quarter 2012 results on the heels of healthy sales in North America and China.

Street analysts had nearly a week to ponder on the company’s scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

Coach’s quarterly earnings of 73 cents a share beat the Zacks Consensus Estimate of 70 cents, and jumped 15.9% from 63 cents earned in the prior-year quarter buoyed by strong top-line growth.

New York-based Coach’s net sales for the quarter came in at $1,050.4 million, up 15.2% year over year and ahead of the Zacks Consensus Estimate of $1,023 million. The rise in sales was a positive indication for the luxury-goods market, which was battered by the recent economic downturn.

Direct-to-consumer sales jumped 17% to $910 million on a 9.2% rise in the North American comparable-store sales and strong growth in the China business with a double-digit rate increase in comparable-store sales. In Japan, sales nudged up 1%, excluding foreign currency translation, whereas in dollar terms, sales grew 10%, when adjusted for a stronger yen.

Indirect sales rose 4% to $140 million, reflecting an increase in U.S. department stores shipments and international wholesale shipments.

(Read our full coverage on this earnings report: Coach Beats on Both Edges)

Agreement of Estimate Revisions

In the last 7 days, 9 out of 19 analysts covering the stock raised their estimates, whereas only 1 analyst lowered the same for second-quarter 2012. For the third quarter, 8 analysts raised their estimates and 1 cut the estimate.

For fiscal 2012 and 2013, 13 and 11 analysts, respectively, moved their estimates upward, with none revising the estimate downward in the last 7 days.

What Drives Estimate Revisions

Clearly, a positive sentiment is palpable among analysts, who remain optimistic on Coach’s performance. Following the earnings release, the Zacks Consensus Estimate has been on the rise with analysts remaining bullish on the stock. The better-than-expected results, and strong earnings and sales outlook bolstered analysts’ confidence.

Management remains confident of sustaining double-digit growth in both top and bottom lines as it enters fiscal 2012. 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. After North America and Asia, Coach also extended its global footprint in Europe. It is also investing in the rapidly growing emerging markets, such as China, Brazil and Vietnam to increase its brand awareness.

We believe that the company’s favorable balance sheet, improved store base and cash flow generation will provide a platform to deliver steady revenue growth as the economy revives.

Magnitude of Estimate Revisions

The magnitude of estimate revisions indicates that the analysts were encouraged by Coach’s healthy first-quarter 2012 performance and buoyant outlook.

The Zacks Consensus Estimates rose by a penny to $1.15 for the second quarter and to 74 cents for the third quarter of 2012, in the last 7 days.

For fiscal 2012, the Zacks Consensus Estimate jumped by 5 cents to $3.45, and for fiscal 2013, it climbed 6 cents to $3.99 in the last 7 days.

Neutral on Coach

Being a leading American dealer of fine accessories and gifts, Coach boasts of a proven strategy of investing in stores to enhance sales through product innovation, a compelling pricing strategy, new merchandise assortments, and a cost-effective global sourcing model, which should help drive comparable-store sales and operating margins in the long term.

Coach maintains a healthy balance sheet with a significant cash balance and a negligible debt load. The company also has been actively managing its cash flows by generating significant free cash, making prudent capital investments and enhancing shareholders’ return. The company’s strong liquidity, positions it to drive future growth.

Coach sells products that are discretionary in nature. On the other hand, the company’s 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 its growth and profitability.

Fashion obsolescence remains the main concern for Coach’s business model, which involves a sustained focus on product and design innovation. The company’s pioneering position may be compromised by delays in its product launches.

Currently, we have a long-term Neutral rating on the stock. However, Coach, which competes with Polo Ralph Lauren Corporation (RL), holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

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