Being a leading American marketer of fine accessories and gifts, Coach Inc. (COH) boasts a proven strategy of investing in stores to enhance store sales productivity through product innovation, 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.
Management also remains confident of sustaining a double-digit growth momentum in both top and bottom lines, after posting better-than-expected first-quarter 2011 results on the back of healthy sales.
The quarterly earnings of 63 cents a share beat the Zacks Consensus Estimate of 55 cents, and surged 43.2% from 44 cents delivered in the prior-year quarter buoyed by strong top-line growth and competitive pricing. Coach said that total net sales for the quarter came in at $911.7 million, up 19.7% from the year-ago quarter, and breezed past the Zacks Consensus Revenue Estimate of $847 million.
The company’s long-term growth drivers include expansion of its global distribution model and venturing into under-penetrated markets. After North America and Asia, Coach now plans to extend its global footprint in Western Europe. It is also investing in rapidly growing emerging markets, such as China to increase its brand awareness.
Coach maintains a healthy balance sheet with a significant cash balance and negligible debt load. The company ended first-quarter 2011 with cash, cash equivalents and short-term investments of $712 million and total long-term debt of $24.8 million and shareholders’ equity of $1,582.7 million.
The company also has been actively managing its cash flows by generating significant free cash, making prudent capital investments and enhancing shareholder’s return. Coach’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 the company’s growth and profitability.
Fashion obsolescence also remains the main concern for Coach’s business model, which requires a 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 be Neutral 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.
COACH INC (COH): Free Stock Analysis Report
POLO RALPH LAUR (RL): Free Stock Analysis Report
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