Coach: A Lone Ranger In The Retail Space

Affordable luxury brand Coach (NYSE:COH) has been making a very persuasive argument that it has turned around its fortunes. In its fourth quarter of FY 2016 (ended June 2016) the company noted a return to positive comparable sales in its North American segment. The positive metric was reported for the first time since the third quarter of 2013, representing the seventh sequential improvement since a transformation plan was implemented by the company. The growth was driven by an increase in the direct business, and actions implemented to elevate the brand positioning and streamline the distribution, given the highly promotional nature of its department store channel. Since then, the company has continued to perform well in the two following quarters. In the latest period, the company delivered top line growth in each of its segments, highlighted by positive comparable sales in North America, and overall gross margin expansion. A breakdown by Market Watch of the S&P 500 companies noted that only two retailers, namely Coach Inc. and O’Reilly Automotive, reported positive comparable sales in the December quarter, a gross margin of at least 50%, and a net income of at least 10% of sales. This reflects the long way the company has come since its rough patch that started in 2012.

See our complete analysis for Coach here

Tough Time For Retailers

The number of US retailers trading at the most-distressed level of credit rating spectrum has more than tripled since the recession of 2008-2009, and is heading towards record levels in the next five years, according to Moody’s Investors Service. The rating agency noted it has 19 names in its retail and apparel portfolio, or 14% of the total, that are ranked as Caa/Ca. This is close to the 16% level seen in 2008-2009. This trend is mainly as a result of a shift in retail, from brick-and-mortar stores to online shopping, forcing a number of companies to spend heavily on their e-commerce operations. While concentrating on the online channel makes sense, an inherent problem associated with this strategy is the increased pressure on margins. Undertaking investment to develop the e-commerce capabilities, as well as for improving the online experience, just means higher costs. Furthermore, in order to compete with companies such as Amazon, retailers will also need to cut down the prices of products sold online. This results in a higher promotional environment, which does not do the margins any favor. With a rise in the contribution of online sales to the total revenue, along with the declining mall traffic, the profit and margins will continue to be negatively affected.

Margins Under Pressure

Each earnings season, the metric that is given the most importance, is the growth in sales or comparable sales. However, how the growth came about should also be factored in. If the sales have been increasing as a result of greater promotional activity, it would imply a reduction in the gross profit and net income margins. Hence, once these metrics are taken into consideration, the results for retailers begins to look very gloomy. Amazon stands apart in this list, since it does not operate any brick-and-mortar stores, and derives all its sales from the internet. As a result, for the purposes of comparison, the company has been excluded.

According to Market Watch analysis, of the remaining 34 S&P 500 retailers, 17 companies noted an increase in comparable sales, and 11 of those reported an improvement in the gross profit margins. These companies have been listed below:

The most impressive part of Coach’s results this quarter was that it was able to increase its sales despite a department store pullback. This has been an offshoot of its decision to curtail its promotional activities, and thus, elevating its image. After successfully cutting down on its discounting, the company emerged out of the quarter with expanding margins, besides the top line improvement.

Have more questions on Coach? See the links below:

• Coach And Michael Kors Still In The Hunt For Kate Spade
• Coach Inc.’s Revenue Rises Despite Department Store Pullback
• 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
• It’s Raining Promotions This Holiday Season In The Handbag Industry
• Coach’s Strong Presence In China To Help The Company In The Future

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