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. This should help drive comparable-store sales and operating margins in the long term.
Management remains confident of sustaining double-digit growth in both the top and bottom lines, following better-than-expected second-quarter 2011 results on the back of healthy sales in North America and China. Coach’s long-term growth drivers include expansion of its global distribution model and entry into under-penetrated markets. It is also investing in rapidly-growing emerging markets, such as China, to increase its brand awareness.
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 shareholders’ return. The company’s strong liquidity positions it to drive future growth.
The company ended the second-quarter 2011 with cash, cash equivalents and short-term investments of $939.8 million, total long-term debt of $23.6 million and shareholders equity of $1,738.5 million. Coach also notified that it bought back approximately 7 million shares at a cost of $55.72 per share, aggregating $388 million during the quarter. The company recently authorized a share repurchase program of $1.5 billion to be exhausted by June 30, 2013.
Coach sells products that are discretionary in nature. 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 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.
At present, we remain concerned about Coach’s operations in Japan, which were recently hit by the earthquake and tsunami. The recent catastrophe in Japan may dent its performance to some extent, as the country contributes approximately 20% to total net sales. About 20 stores were closed following the devastation.
Given the pros and cons, we prefer to have a long-term “Neutral” recommendation on the stock. Moreover, Coach, which competes with Polo Ralph Lauren Corporation (RL), holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating, correlating with our long-term view.
COACH INC (COH): Free Stock Analysis Report
POLO RALPH LAUR (RL): Free Stock Analysis Report
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