Can Coach Inc. Continue With Its Positive Earnings Surprise Streak In Its Second Quarter?

Coach (NYSE:COH) is scheduled to report its second quarter earnings on January 31, 2016, for the period ended December 2016. For the quarter, the consensus estimate for the revenue comes in at $1.32 billion on earnings of 74 cents per share. The company has a history of beating the consensus estimates, with the company surpassing the consensus estimate by an average of 6.7% in the trailing four quarters.

The apparel sector has been under pressure lately, and Coach as a member of this industry has been no exception. After a rally in the first half of 2016, Coach’s stock price has witnessed a decline, to levels seen at the beginning of the year. The company’s closing price rose to a high of $43.46 on August 1, but has seen a steady decline thereafter, with fears of a poor year-end performance. While Coach isn’t alone in being out of favor in the retail industry, given its recent performance, the decline in its share price may not be warranted.

See our complete analysis for Coach here

The company is in the midst of a brand transformation, and is focused on introducing the modern luxury concept stores in key markets. The acquisition of Stuart Weitzman has been accretive to its performance, with growth in this brand exceeding expectations. The company’s continued investment into the Stuart Weitzman brand will help to drive global awareness and brand relevance, and to gain traction with the international and millennial consumers.

Key factors influencing the quarter include:

• Department Store Pull Back

Coach’s decision to pull the company’s handbags and leather goods out of 25% of department stores, or by over 250 locations, has also been a positive step, as the heavy discounting in this channel has hurt its luxury brand image. Furthermore, the company intends to reduce the markdown allowances to the channel, citing a highly promotional environment embraced by such stores. The heavy discounts offered in this channel makes it harder for consumers to spend more on a similar bag at the company’s own stores or its e-commerce websites. While this strategic decision negatively impacted sales by 150 basis points in the first quarter of 2017 (ended September), it is expected to have significant long term gains. These steps are being taken to elevate the brand positioning, which was reflected in the above-$400 price bracket rising in penetration to over 50% of the handbag sales. This further drove the handbag AURs (Average Unit Retail) to over $300. While these efforts have resulted in a slow growth, an overall growth of 1% for the company, it has resulted in a better bottom line performance and a healthy inventory position. The company was able to reduce the inventory from $575 million in the year ago period, to $547 million at the end of the September quarter, putting it in a better position heading into the holiday selling season.

• Chinese Market Growth

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 in the face of a slow down in the Chinese luxury market. 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.

Have more questions on Coach? See the links below:

• Part 2: Is There A Way Out Of The Rut For Brick And Mortar Stores?
• Retailing Conundrum, Part 1: Is There A Way Out Of The Rut For Brick And Mortar Stores?
• Retail Companies Get A Boost Amid Border Tax Reform Complications
• Instead Of Just Its Bags, Could The Kate Spade Company Be Up For Sale?
• It’s Raining Promotions This Holiday Season In The Handbag Industry
• Coach Continues With Its Positive Momentum In North America
• Can Coach Continue Its Positive Earnings Surprise Streak?
• Is A Coach-Burberry Merger In The Cards?
• Why Has Coach’s Stock Price Risen 30% In One Year?
• What Is Coach’s Plan With Regards To Its Store Footprint?
• Coach Q4 And FY 2016 Earnings: A Return To Growth In North America
• Why Do We Feel Coach Has A 17% Upside Potential?
• 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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