Coach???s Balancing Act - Analyst Blog
27 Marzo 2012 - 8:00AM
Zacks
Being a leading American marketer
of fine accessories and gifts, Coach Inc. (COH)
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.
Management remains confident of
sustaining double-digit growth in both top and bottom lines in
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 rapidly growing emerging markets, such as China, Brazil, Vietnam
and Kuwait to increase its brand awareness.
Management now expects to achieve
at least $300 million in sales in fiscal 2012 in China, backed by
the sustained growth momentum it is currently witnessing. As a part
of its strategy to directly control certain Asian markets, Coach is
now directly operating its retail business in Singapore and Taiwan.
The company is also under discussion to acquire its Malaysian
retail business in July.
Coach maintains a healthy balance
sheet with significant cash balance and negligible debt load. The
company also has been proactively managing its cash flows by making
prudent capital investments and enhancing shareholder returns. The
company’s strong liquidity positions it well to drive future
growth.
Efforts Reaping in
Healthy Results
Coach posted better-than-expected
second-quarter 2012 results on the back of healthy sales in North
America and China. 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.
The rise in sales was a positive
indication for the luxury-goods market, battered by the recent
economic upheaval. Coach’s sustained focus on store sales
productivity, merchandising, and marketing and strategic pricing
have helped it remain afloat in a difficult consumer environment as
well as drive comparable-store sales growth. Coach remains
optimistic about its dedicated stores for men, and expects the
Men’s business to rise twofold to more than $400 million in fiscal
2012 on a global basis.
Concerns
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 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.
Closing
Commentary
Given the pros and cons, we prefer
to have a long-term ‘Neutral’ recommendation on the stock with a
price target of $81.00. 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.
COACH INC (COH): Free Stock Analysis Report
RALPH LAUREN CP (RL): Free Stock Analysis Report
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