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Coach: all set for a revival...at least on the trading floor

By Angela Gonzalez-Rodriguez

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Business |ANALYSIS

Coach Inc kicked the weekly earnings for the fashion industry, posting profit and sales that although continued declining in the latest quarter, declined less than expected by the market. The timid recovery has encouraged the retailer to indicate that its turnaround efforts are making progress.

“We drove further sequential improvement in our North America bricks and mortar business—led, as expected, by our retail stores—with this momentum continuing into the second quarter,” Chief Executive Victor Luis said, as reported by the ‘Wall Street Journal’.

North American Coach-brand sales dropped 11 percent in the first quarter ended September 26. However, these figures are better than those from a quarter ago. International sales declined 3 percent.

As part of the turnaround plan led by Luis, Coach has cut down promotions, improved its designs and material quality, and closed under performing stores.

Coach INc turnaround plan starts to pay off, despite the quarterly sales decline

Håkon Helgesen, Retail Analyst at Conlumino, highlights how despite the 9.3 percent annual sales slip means for Coach “something of an improvement on the double digit declines the company posted across every quarter of last fiscal year, it still represents a dire performance of a brand that is struggling to reinvent itself.”

“Indeed, this year’s year-over-year drop comes off the back of a 10 percent fall in net sales in Q1 of last year, and is the first time in five years that the company has opened its fiscal with sales of under one billion dollars,” further points out the analyst at Conlumino.

For Helgesen, “Coach is a classic example of a company that became a victim of its own success. A dominant position in the North American market meant its products became ubiquitous — something that sits uncomfortably with the concept of luxury, where a degree of exclusivity needs to be maintained.”

This ubiquity – also seen in the likes of Michael Kors, has fuelled by Coach’s heavy expansion into malls, the widespread use of promotions, and the introduction of cheaper, more accessible products. “While such tactics drove growth for a while, they ultimately tarnished the company’s luxury positioning, and the sales to those looking for products with cachet declined,” concludes the analyst.

Analysts reaction to Coach FY16 Q1 results

In regards to how analysts view the stock, the majority see the potential of the high-end handbag maker, analysts at Susquehanna assigning a positive rating to Coach Inc (NYSE:COH) with the price target of 40 dollars apiece. It has earned a consensus ‘buy’ rating, according to Zacks Investment Research, with one analyst recommending to sell, and 11 rating the stock as a ‘hold’. On the other hand, Zero says it’s a ‘buy’ and nine other analysts have assigned a ‘strong buy’ rating to the company.

Shares of Coach were up by 0.92 percent to 30.60 dollars per share in after-hours trading on Monday, ahead of the release of the company's first-quarter earnings results. The New York City-based luxury apparel brand was expected to report earnings of 39 cents per share on revenue of 1.04 billion dollars for the most recent quarter.

In fact, adjusted earnings of 41 cents surpassed the Zacks Consensus Estimate of 39 cents per share. “However, the bottom line fell 22.6 percent from 53 cents a share earned in the year-ago quarter,” highlighted the analysis firm in a note issued Tuesday.

Coach’s net sales of 1,030.3 million dollars for the period also came in ahead of Zacks Consensus Estimate of 1,022 million dollars but decreased 0.8 percent year over year.

“Taking Coach as a stand-alone brand, management maintained its previous projection of low single-digit growth in revenue in constant currency for fiscal 2016, on a 52-week basis. However, including anticipated sales of 335 million dollars from the addition of the Stuart Weitzman brand to its portfolio, revenue is expected to increase in high-single digits and contribute 9 cents a share to the bottom line.”

Of a similar opinion is analyst Thomas Filandro, who believes that Coach’s “share performance will hinge on the success of brand revitalisation in NA, which we believe has reached a tipping point.” With the share price more than 30 percent off its 52-week high, as well as a robust 4.5 percent dividend yield, Filandro foresees this as an attractive opportunity to own a “highly recognisable and evolving brand,” with a compelling risk-reward profile.

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