Why Do We Feel Coach Has A 17% Upside Potential?

There are a number of factors prompting us to be bullish on Coach (NYSE:COH). Some of the key reasons have been listed below.

1) Turnaround of Coach’s North American Business

One of the highlights of Coach’s third quarter (ended March 2016) was the turnaround of the company’s business in its most important region – North America. Same store sales at the retail stores there remained unchanged, after several quarters of negative comps. This represented the fourth consecutive quarter of improvement for the company in the region. While store and mall traffic remained soft, the average value spent by the consumer was higher than a year prior, with the handbag AUR (average unit retail) rising to over $300 in the quarter, a figure reached for the first time since FY 2009. The renovated luxury store concept of the company also proved to be a hit, with positive comps seen in such stores. Furthermore, the sales of premium bags increased, when compared to six months before, with higher penetration of the above $400 price bracket. This segment now forms 40% of the handbag sales, versus 30% in the previous year.

In the quarter, the North American the premium women’s handbag and accessories market also witnessed low single digit growth. In the future as well, we expect such growth to continue, with reduced discounting activity being conducted by the major brands.

2. Collaboration With Disney

Coach teamed up with Disney for a range of handbags, t-shirts, and sneakers, featuring the world’s most iconic mouse. This collection debuted in New York and Paris on June 10th, followed by its other stores on June 17th. Since the launch, several items have sold out online, including all four colors of the $395 kisslock handbags, designed in the shape of Mickey’s ears, and $1,500 leather dolls and bean bags. Such limited editions help prevent discounting in order to move inventory, which would otherwise lower the brand value.

One of the reasons for a successful third quarter was the positive response to its Coach X Peanuts collaboration, also called the Snoopy collection. During the third quarter conference call, Victor Luis, Coach’s CEO, mentioned the “exceptional response to the Snoopy fashion vignette,” implying a positive reaction by customers to the company’s innovation and novelty. While Peanuts and Snoopy are well-liked, their level of popularity can’t be compared with that of Mickey Mouse. Hence, we can expect the Disney collaboration to be a massive boost to the top line in FY 2017, beginning in July of this year. While this launch may not have much of an impact on the fourth quarter results, as it was launched globally with less than two weeks of the quarter remaining, positive media coverage and feedback may result in higher than expected sales for this quarter. This factor may even result in market share gain by the company.

3. Lease-Back Deal For Its Headquarters At 10 Hudson Yards

One of Europe’s largest insurers – Allianz SE – acquired a 44% stake in 10 Hudson Yards, buying out Coach’s stake. COH, which had reportedly paid $530 million to purchase its 738,000 square foot space, along with $220 million to build it out, received $707 million in the deal, while simultaneously signing a 20 year lease for its headquarters. The company was the first tenant to commit to the project in 2011, and occupies the 7th to 24th floors of the building, making it the largest tenant in the building. The company is bringing together its Coach and Stuart Weitzman brand under one roof, and employees of both began moving in this May. According to UBS, the sale-leaseback of this property will add $0.03 to FY 2017 EPS, and $0.18 to FY 2018 EPS of the company. This would be a result of an increased level of share buybacks and debt repayment on the part of the company.

4. Growth Of The Chinese Market

While many fashion brands are looking to North America as they feel the effects of a slowdown in China’s luxury market, accessible luxury brand Coach is seeing the opposite phenomenon, with double digit growth seen in the nine months of their FY 2016. Coach has been an aggressive early mover and a pioneer in the affordable luxury segment in China, profiting in this region despite many other International luxury brands taking measures, such as dropping prices, to spur their sales. Coach acquired the domestic retail businesses from its distributors in Hong Kong, Macau, and mainland China (Greater China) in Fiscal 2009. Coach has since gone from strength to strength, expanding aggressively in the region, and being rewarded by the achievement of strong growth. The company has been relatively immune to the anti-corruption crackdown that has hurt other Western brands, due to its relatively less expensive products.

Coach has also been adept at the use of its digital marketing, building strong connections with Chinese consumers, and keeping them updated with the new store openings and latest collections. According to The Digital IQ Index: Luxury China 2016, Coach has the third best digital strategy in China. Moreover, the launch timing of its new Disney collection could not be any better, with the opening of the Shanghai Disneyland on June 16th. The company’s seven stores in Shanghai can be expected to get added attention as a result of this.

Have more questions on Coach? See the links below:

• How Will Coach Close Out Its Financial Year?
• What Will Be Coach’s Revenue And EBITDA Breakdown In 2016?
• How Will Coach Perform In 2016?
• What Will Be The Impact of Coach’s Collaboration With Disney?
• How Has Coach’s Revenue Per Square Foot Changed Over The Years?
• What Percentage Of Coach’s Stock Price Can Be Attributed To Growth?
• What Has Resulted In A Decline In North American Net Sales And A Rise in International Sales For Coach So Far In FY 2016?
• Coach’s Strong Presence In China To Help The Company In The Future
• How Did the Different Segments Of Coach Perform In Q3 2016?
• How Has The Transformation Plan Affected Coach’s North American Retail Store Count?
• Coach Q3 2016 Earnings And Revenue Beats Expectations
• What To Expect From Coach In Q3 FY 2016?
• Is Coach’s Transformation Plan Working?
• Coach: Year 2015 In Review
• Is The Men’s Segment Becoming Big Business For Coach?
• How Will Coach’s Revenue And EBITDA Change In The Next 3 Years?
• What Is Coach’s Fundamental Value Based On Expected 2016 Results?

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