Coach, Inc. (COH) Pitch
Retail (Apparel) Industry
Gary Mancini
1/31/12
Current Price = $68.51
Thesis: Long COH based on:
-continued sales strength in the U.S.
-growing retail business in Asia
-further development of Coach Men’s, and
-COH’S strong brand equity and market opportunity to become a global brand name
-bullish technical trend
Competitors: Liz Claiborne Inc., Ralph Lauren Corp, VF Corp., Jones Group
Company Info
Coach is the largest U.S. luxury handbag maker. COH designs, makes and markets fine accessories for women and men, including handbags, weekend and travel accessories, outerwear, footwear, and business cases. The company operated in two segments: Direct-to-Consumer, which includes sales to consumers through company-operated stores in North America, Japan, Hong Kong, Macau and mainland China, the Internet and the company’s catalog; and Indirect, which includes sales to wholesale customers and distributors in more than 20 countries, including the U.S., and royalties earned on licensed products.
Basic Stats
Market Capitalization: $20.0B
Enterprise Value: $19.05B
Beta: 1.6
52 week price range: 45.7– 70.00
Earnings Per Share: (ttm): $3.20
Dividend Yield: 1.31%
Industry
-In 2011, the sub-industry index (Apparel, Accessories & Luxury Goods) rose 17.2%, versus a 0.3% decline for the S&P 1500.
- Accessories and differentiated fashion outperformed, and luxury brands rebounded in 2011
Q2 2012 Earnings Review
-Coach reported better than expected results
-Coach reported 2Q revenue of $1.45bn and EPS of $1.18
-beat estimated $1.43 bn and $1.15
-Direct to Consumer Sales (89% of revenue) rose 17% in quarter
North America
- 8.8% comp increase highlights strength in the U.S
- Good signs for continued dominance in women’s accessories market and continued expansion into Men’s Market
Japan
– Coach opened 6 new stores (4 Men’s), now 184 stores
China
- Sales exploded with ‘double digit’ comps.
- 9 new stores opened
-Strong earnings- 18% y/y earnings growth
-strong margin performance (gross margin of 72.2% from 72.4% a year ago) is solid considering the tight mall environment and higher sourcing costs
-Strong presence in Asia
-Coach continues diversification in Asia and strength in China (comps up double digits, en route to $300M plus in revenue)
-Men’s $1B Opportunity Detailed
-long term men’s business strategy that includes expansion of men’s assortment into existing stores, expansion of dual gender and men’s only stores in Asia and rollout of men’s specific sores in U.S and Asia.
-Expected to allow a doubling of men’s sales in FY12
Catalysts:
- 1. Strong Earnings Strength
-EPS increased from $2.89 to an estimated $3.34 over the past five quarters, showing great earnings momentum
-Luxury brands rebounded in 2011, despite the economic uncertainty
-Momentum expected to continue into 2012, as increased consumer awareness of brands in emerging markets will drive growth
- 2. Expanding Global Market Opportunity
-In FY 12, the company expects to expand global retail square footage by 14%, concentrating on China, where it expects sales of over $300 million, and on Coach’s Men’s, expecting over $400 million in sales
Asia
- Global market projected at 24$ billion in 2011
- Japanese consumer makes up 40% of the global handbag/ accessories market and Coach estimates it holds 16% of market
- Expansion will focus on leveraging booming men’s business there and the developing economies are the next place of growth in this industry
- With 66 locations in the Asian area, the focus on expanding Asian distribution increased COH’S FY 11 market share in China to 6%, or $185 million
- Key is Coach is implementing a similar multi-channel model structure in Japan, one that is effective in the US, and believes that Japan can support at least 180 locations
- Diversification in Asia- Coach continues to control additional areas
- Taiwan retail taken direct in January
- Malaysia retail to be in July
- Leveraging position in Japan while diversifying
- Higher margin international sales increases EBIT margins
- 3. Strong Revenue Growth
-Coach is the number one luxury accessories brand in the U.S., with an estimated 20% share of the $9.3 billion market ($100+ handbags)
-The market grew 10% in FY 11 and Coach outpaced this with a 17% increase in its own stores
-Over the past five years, COH has posted a revenue compound growth rate of 15%
-S&P has FY 12 sales of 4.72 billion
-Company intends to grow North American retail locations to over 500 locations including 30 in China
-Coach goal is to build share of North America and Japans Men’s market
4. Bullish Technical’s and Strong Price Movement
- 1- year price up 26.8%
- Strong, Positive price action
- 3 yr chart shows strong supports to upward trend
-Currently trading above 25, 50, 200 SMA
-Has found support around 68$ after reaching new high
- 5. Business Strength
-Through FY 11
-5 yr gross profit CAGR of 14%
-5 yr EBIT CAGR of 13%
Total assets grew CAGR 10%
-At the top of peer group with FY 11 returns of 32% for ROA, and 57% ROE
-The company has implemented a flexible sourcing and manufacturing model, allowing it to bring a broader range of products to the market more rapidly and efficiently
Potential Risks
1) Economic Uncertainty
-1.6 beta
2) Sharp drop in consumer spending
-weakened economy with higher unemployment has held back the apparel and accessories industry
3) Fashion and Inventory Risks
4) International Expansion Difficulties
Analyst Target Prices
S&P500 – $80.00 based on 21x 2012 EPS estimate of $3.81 (10 yr historical forward P/E multiple of 18x)
The Street – $90.42
Credit Suisse – $75.00
Target: $79.2 based on 22x 2012 EPS estimate of ~3.6