QUOTE AND NEWS
newratings.com  Jun 30 
NEW YORK, June 30 (newratings.com) - Analysts at Robert W Baird initiate coverage of Coach Inc (ticker: COH) with an "outperform" rating. The target price is set to $32. [more]
TheStreet.com  Jun 23 
June is giving shoppers very little reason to shop -- and retail sales are feeling the brunt of this pain.
TheStreet.com  Jun 23 
Options traders took bullish positions in Intel, Palm and Melco.
Market Intelligence Center  Jun 23 
Coach (COH) appears to be on the move today and is now at $25.34, down $1.12 (-4.23%) on volume of 3,090,749 shares traded. Over the last 52 weeks the stock has ranged from a low of $11.41 to a high of $32.95. Coach stock has been showing support...
TheStreet.com  Jun 22 
Traders are taking bullish positions in Coach after an investor expressed optimism about the company's profitability.
TheStreet.com  Jun 22 
Traders may want to take firm up their stops as the markets are taking a beating.
TheStreet.com  Jun 22 
Coach will introduce a lower-priced collection on Friday.
MarketWatch  Jun 22 
Retail stocks head lower with the broader markets to start the week, with Walgreen drawing investor scrutiny as the drugstore chain’s third-quarter profit drops more than analysts had estimated.
TheStreet.com  Jun 20 
Mid-cap stocks that rule, plus why one pro is bullish about a global recovery.
TheStreet.com  Jun 12 
Compellent Technologies, Coach, Forrester Research, Pengrowth Energy Trust and Smith Micro Software are upgraded.
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BULLS: REASONS TO BUY

 
100% agree
 
Huge amount of liquidity

 
100% agree
 
Management knows what they're doing

 
0% agree
 
Coach in good position to perform well in 2009

BEARS: REASONS TO SELL

 
100% agree
 
Gap's large growth in late 1990s flooded American closets

 
50% agree
 
Still subject to the whim of the economy

 
0% agree
 
Slow in Japan

 
COH AT A GLANCE
 
 
 
 
 
 
 
 
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Coach Inc. (NYSE: COH) is a leading retailer of premium handbags and accessories, located primarily in North America and Japan. It is a company that has based its image on "affordable luxury," a premium brand that caters to affluent consumers but also provides lower-priced goods to appeal to middle-income people who are unable to afford higher-priced products. In this product niche, COH competes against European rivals Louis Voitton , Gucci, and Prada.

Due to effective merchandising and building its brand, Coach has boasted high operating margins and increasing popularity within the U.S. and Japan for years, and even in the suffering American economy Coach is one of a few retailers to post an increase in sales from fiscal 2007 to fiscal 2008. The company also intends to take advantage of increasing luxury consumption in China by taking more control of its retail operations there and building its own stores instead of selling its products through third-party retailers. The company is currently under investigation on behalf of some of its investors over possible securities violations. Specifically, the investigation is meant to decide whether the company misrepresented its anticipated growth and neglected to mention the growth it experienced in 2007 was unsustainable.[1]

[edit] Business Overview

Coach is a leading American manufacturer and retailer of leather goods, accessories and apparel for men and women. Coach occupies the affordable luxury segment, which provides high-end merchandise for both high and middle-income consumers. For example, prices for a Coach handbag can range from $298 to $6,000.[2]

[edit] Business and Financial Metrics

Coach is divided into two segments:

  • Direct-to-consumer(80% of Fiscal 2008 sales) consists of retail and factory stores in the United States and Japan, in addition to the Coach website and catalog.[3]
  • Indirect(20% of fiscal 2008 sales) consists of wholesales to department stores in the United States and Asia.[3]

Note: Coach's fiscal year ends June 28.

[edit] 2nd Quarter Fiscal Year 2009

Net sales for the second quarter were $960 million as opposed to $978 million the previous year.[4] Also, direct-to-consumer sales increased to $818 million from $803 million the previous year and indirect sales decreased 19% to $143 million.[4] North American same-store sales decreased by 13% and sales in Japan rose 15% in dollars.[4] The decrease in sales is attributed to the weak economy and declining demand for handbags. The company estimates the American handbag market declined by 10% in the fourth quarter of calendar year 2008. In addition, foot traffic in the stores worsened during the holiday season due to the management's refusal to follow other retailers and discount its products.[4]

[edit] Tiered Pricing Structure

Coach’s product is classified as a “luxury” item but is accessible to a larger market due to the variety of price points that the company offers. Analysts have noted that this tiered pricing strategy is not common in the luxury goods industry, which on average has higher entry-level price points than that of Coach. This pricing strategy is very similar to that used by Tiffany (TIF) and other brands in the affordable luxury market. This pricing structure allows the company to attract affluent consumers while also providing lower-income consumers access to a brand they would not be able to afford otherwise.

[edit] Branching into Other Product Categories

Handbags are the company's main driver of sales. However, since fiscal year 2006 handbags as a percentage of total sales dropped from 65 to 62%.[5] Accessories as a percentage of total sales increased from 28 to 29%[5] and all other products increased from 7 to 9%.[5] Though small, these changes are evidence of the fact Coach has been attempting to diversify its product offering. During fiscal year 2008, Coach expanded its jewelry line to include sterling silver and gold-plated fashion items. Also, in 2007, the company entered a partnership with a division of Estee Lauder Companies (EL) to produce perfume. During fiscal year 2008 this partnership was expanded to include lip gloss and body lotion.[5]

Handbags are COH's number one product in terms of sales, and the firm's success is dependent on this niche product.
Handbags are COH's number one product in terms of sales, and the firm's success is dependent on this niche product.
[5]

Note: Accessories includes men's and women's wallets, belts, keychains and watches. Other Products includes footwear, apparel, eyewear and fragrances.

[edit] International Opportunities

Coach has an established presence in the U.S. and Japan and is expanding into other Asian markets. Coach has virtually no European presence and has no plans to compete against established brands there.

About 40% of COH's sales come from international markets, especially Japan.
About 40% of COH's sales come from international markets, especially Japan.
[3]

[edit] Japan

Coach, Inc. first entered the Japanese market in 2001. Fiscal 2008 sales rose 23.4% from fiscal 2007.[6] At the end of fiscal 2008 Coach had 149 stores in Japan.[7] Coach's Japan operations constituted 19% of net sales in fiscal 2008. Currently, Coach is the #2 highest-selling handbag retailer in the country, though its 8% market share is dwarfed by Louis Vuitton's 28% share.

[edit] Other markets

Coach has an aggressive plan in place for expansion within Asia, including China. Macroeconomic downturns in certain parts of Asia thus may have a negative impact on Coach's operations now and going forward. China is expected to be a growth market for this industry with the emergence of a decent-sized middle class there and expected continued economic growth.

[edit] Trends and Forces

[edit] Coach Performance Remains Strong Despite Flagging Economy

Image:Global_Chart.gif‎

Retailers have had to weather a difficult economic environment during 2008. Many Americans are unsure of their financial security; companies have resorted to laying off workers in an effort to cut costs. In an uncertain economic environment consumers seek to cut costs and save as much money as they can, and clothing is usually the first to go.[8] This decrease in consumer confidence has adversely affected many retailers across all levels, from low-priced brands to luxury stores. Coach, however, has managed to maintain strong sales in a time when its counterparts are struggling to keep consumers buying their products. The company's strong sales are primarily a result of higher sales at factory stores (consumers who want to spend less would be more attracted to discounted merchandise) as well as an especially strong product offering: the Madison line of handbags, which combines a popular design with a lower price point than previous handbags--an effort to provide a high value proposition to its customers.[4] Net sales for the first quarter of fiscal 2009 were $753 million, an 11% increase from the same period last year.[4] Direct-to-consumer sales for the same period rose 16% to $592 million.[4] This good performance allows Coach to enter the holiday season in a much better position than many other retailers that have had to face declining sales.

[edit] Coach Seeks to Take Advantage of China's Growing Affluent Class

Coach has primarily stayed focused in North America and Japan. However, China is becoming an increasingly important market for luxury retailers. The rise of China's middle class has led to an increase in disposable income and thus an increase in potential customers. China spends more than $2 billion a year on luxury products.[9] In addition, by the end of 2006 the country had 345,000 U.S. dollar millionaires, a third of which (115,000) were women.[9] What this means is that there is a growing affluent class in China that is capable of purchasing Coach products across all price points. In March 2008 Coach entered an agreement with ImagineX, its Asian distributor, to acquire 24 retail locations by May 2009.[10] This deal will allow the company greater control over its Asian operations and allow it to better take advantage of the country's new wealth. Over the next 5 years Coach plans to open a total of 50 retail locations in China and increase its market share from 3 to 10%.[9]

[edit] Luxury Image Essential for Sales

As with any luxury or affordable luxury retailer, Coach heavily relies on an image of exclusivity to fuel interest and sales of its products. A luxury company can lose its "luxury" status if the brand becomes too popular or too accessible. Coach thus takes a risk by having factory stores that sell discounted merchandise. None of Coach's competitors, such as Louis Vuitton and Gucci, have factory stores--they would be in direct opposition to the air of exclusivity the brands seek to cultivate. However, Coach protects its luxury status by placing its factory stores at least 60 miles away from its full-price locations.[11] In addition, the factory stores never sell the latest merchandise--they sell last year's or irregular pieces in addition to products that are manufactured specifically for the factory store. Coach never has sales at its full-price stores and does not allow retailers such as Macy's Inc. (M) to discount its merchandise. The result of these actions is that the factory stores and flagship locations serve two different demographics and are separate enough that the factory segment does not tarnish the overall image of the brand.[11]s

[edit] Competition

Most of Coach's closest competitors are either privately owned or owned by larger European conglomerates of various luxury brands. Consequently, comparative data is unavailable. This includes Louis Vuitton and Fendi, both owned by LVMH Moet Hennessy L.V. (LVMUY), and Gucci Group.

Coach's business model is chiefly distinguished by its stress on "accessible luxury." This model thus reaches a larger demographic compared to many of Coach's higher-priced competitors, including Louis Vuitton, Gucci, and Prada. These competitors tend to focus on a higher income, high-fashion demographic. Companies like Dooney & Burke and Cole Haan also stress "accessible luxury" and are Coach's most successful competitors; however, Coach's market share has continued to increase in their presence.

Coach's broad appeal and high volume, well-scaled operations allow it to maintain operating margins at 37.1% in 2008.[12] This margin is high compared to other luxury companies such as the fashion and leather goods division of LVMH Moet Hennessy L.V. (LVMUY), whose operating margin in 2008 was 32.1%.[13]



[edit] References

  1. "Coach, Inc. Investor Investigation"
  2. Coach website
  3. 3.0 3.1 3.2 COH 2008 Annual Report pg. 3 and 5  
  4. 4.0 4.1 4.2 4.3 4.4 4.5 4.6 Coach, Inc. F2Q09 (Qtr End 12/27/08) Earnings Call Transcript.
  5. 5.0 5.1 5.2 5.3 5.4 COH 2008 Annual Report pg. 2  
  6. COH 2008 Annual Report pg. 21  
  7. COH 2008 Annual Report pg. 4  
  8. James Russo. Times Are Not As Tough for Some: Consumers in emerging markets are likely to perceive the recession will be short.
  9. 9.0 9.1 9.2 Joseph Chaney. Handbag brand Coach plans major expansion in China..
  10. COH 2008 Annual Report pg. 1  
  11. 11.0 11.1 Coach's Split Personality.
  12. Coach (COH) Annual Report 2008, Financial Highlights
  13. LVMH Moet Hennessy (LVMUY) Annual Report 2008
 
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