Despite lingering economic woes,
Coach, Inc. (COH), the designer and marketer of
fine accessories and gifts, recently posted better-than-expected
second-quarter 2012 results on the back of healthy sales in North
America and China.
Street analysts had enough time to
ponder over 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
New York-based Coach unveiled its
second quarter financial results on January 24. The quarterly
earnings of $1.18 per share beat the Zacks Consensus Estimate of
$1.15, and increased 18% from $1.00 earned in the prior-year
quarter buoyed by strong top-line growth.
Coach said that net sales for the
quarter came in at $1,448.6 million, up 14.6% from the year-ago
quarter, and outpaced the Zacks Consensus Estimate of $1,430
million.
Direct-to-consumer sales jumped 17%
to $1.28 billion driven by an 8.8% 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. Indirect
sales remained flat at $166 million on a comparable basis, affected
by the timing of international shipments.
The rise in sales was a positive
indication for the luxury-goods market, battered by the recent
economic upheaval. Management remains confident of sustaining
double-digit growth in both top and bottom lines in fiscal
2012.
(Read our full coverage on this
earnings report: Coach Beats on Both Edges)
Agreement of Estimate
Revisions
The agreement of estimate revisions
indicates that the majority of the analysts were unidirectional
following Coach’s second-quarter 2012 results.
In the last 7 days, 10 out of 21
analysts covering the stock raised their estimates, whereas only 1
analyst lowered the same for the third quarter of 2012. For the
fourth quarter, 8 analysts revised their estimates upwards and 3
made downward revisions.
For fiscal 2012, 18 analysts moved
their estimates up, with none lowering the same in the last 7 days.
For fiscal 2013, 16 analysts increased their estimates and only 1
analyst trimmed the same.
What Drives Estimate
Revision?
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 the majority of the analysts
remaining bullish on the stock. The better-than-expected results
and a double-digit growth forecast in sales and earnings bolstered
analysts’ confidence, who tweaked their estimates to better align
with management’s projections.
Further, analysts were impressed by
the company’s dedicated men's stores. Coach remains optimistic
about its men's stores, and expects this business to rise twofold
to more than $400 million in fiscal 2012 on a global basis.
Management’s projection of achieving at least $300 million in sales
in China, backed by sustained growth momentum, also encouraged the
analysts, who went on to revise their estimates upwards. However,
the turbulent economic environment still remains a matter of
concern.
Magnitude of Estimate
Revisions
The magnitude of estimate revisions
by the analysts is clearly reflected through changes in the Zacks
Consensus Estimates.
The Zacks Consensus Estimates moved
up by a couple of cents to 75 cents for the third quarter of 2012,
and by a penny to 85 cents for the fourth quarter, in the last 7
days.
For fiscal 2012, the Zacks
Consensus Estimates rose 4 cents to $3.50 in the last 7 days. For
fiscal 2013, the Zacks Consensus Estimates jumped 6 cents to
$4.07.
Closing
Comment
Being a leading American marketer
of fine accessories and gifts, Coach boasts of 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 the expansion of its global distribution model and
venture into under-penetrated markets. After North America and
Asia, Coach also extended its global footprint in Europe. It is
also investing in promising markets, such as China, Brazil, Vietnam
and Kuwait to increase its brand awareness.
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. 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 the
main 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.
Given the pros and cons, we prefer
to have a long-term ‘Neutral’ recommendation on the stock. However,
Coach, which competes with Polo Ralph Lauren
Corporation (RL), holds a Zacks #2 Rank that translates
into a short-term ‘Buy’ rating, and reflects the company’s
optimistic attitude of accomplishing double-digit growth in both
top and bottom lines going forward.
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/
COACH INC (COH): Free Stock Analysis Report
RALPH LAUREN CP (RL): Free Stock Analysis Report
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