Why Has Coach Inc.’s Stock Price Shot Up In 2017?

Coach (NYSE:COH) has had a stellar year so far, with an improved performance, elevated brand positioning, and the acquisition of Kate Spade in the bag. According to a breakdown by Market Watch, among the S&P 500 companies, 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.

The positive performance has been reflected in the stock price. Below we have highlighted some factors which we feel have resulted in the company’s stock price appreciation.

1. Brand Transformation And Elevation

Coach has been working hard to transform its brand in recent years, in the wake of market share loss to Michael Kors and other rivals, who also employed Coach’s strategy of selling luxury products at affordable prices. The company hired a new designer, Stuart Vevers, who introduced higher end products, and undertook to remodel the stores. The retailer has also recruited Selena Gomez to be their new face, in order to appeal to the younger shoppers.

Coach is also continuing to establish its modern luxury concept globally, renovating and opening 50 locations in the second quarter, including 17 in the directly operated North American business, taking the total up to 600 globally. This is in line with the retailer’s target to end the year with over 700 stores in the new format, representing a vast majority of the traffic the company receives. This will also be a boost to the earnings, as the comps in such stores exceed those in the balance of the fleet. The mystery shopper scores, a key metric used to assess how well the company delivers its unique modern luxury experience, were up in the quarter at over 85%, compared to 75% in last year’s third quarter. All these steps undertaken, together with the department store pullback, have helped to drive brand elevation. This is reflected in the penetration of the above-$400 price bracket products, which increased to 55% of the handbag sales in the March quarter, a massive rise from the 40% seen last year.

Coach has also launched a number of services such as monogramming, leather conditioning, emoji stamps, and a customizable bag program. Across its global fleet, 28 Craftsmanship Bars were installed by the end of the third quarter, with another 7 to be added by the end of the fiscal year.

2. Improved Performance

A positive performance of the company in its second quarter of FY 2017 (ended December 2016), results of which were declared on January 31st, started the year off on a high note. Amid a challenging and volatile global retail environment, the company was able to deliver top line growth in each of its segments, highlighted by positive comparable sales in North America, and overall gross margin expansion. Despite the department store pullback, the retailer witnessed double digit growth in its earnings. While the revenue was in line with the consensus expectations, the company beat the earnings per share estimates by a penny.

The company delivered its third quarter sales on May 1, reporting earnings of 46 cents per share on sales of $995 million. Analysts, on the other hand, had expected an EPS of 44 cents and sales of $1.02 billion. The decision to “elevate the Coach brand’s positioning in the North American wholesale channel” resulted in the revenue miss, according to the company. Coach’s strategy, of limiting the promotions on its products, and to pull the company’s handbags and leather goods out of 25% of department stores, or at over 250 locations, was finally reflected in the bottom-line, and resulted in gross margin expansion in each segment in the quarter. Moreover, encouraged by the improved performance, and the possibility of additional growth through acquisitions, the stock price of the company shot up over 11%, making it the biggest gainer in the S&P 500 on May 2nd.

3. Acquisition Of Kate Spade

After months of speculation, Coach finally declared, on May 8th, that it had signed a definitive agreement to acquire Kate Spade for $18.50 per share, valuing the deal at $2.4 billion. The complementary nature of the businesses should result in savings of $50 million within three years of the deal closing, according to Kevin Wills, CFO at Coach Inc.  Moreover, the deal should be accretive to Coach’s earnings in FY 2018, with double-digit percentage earnings accretion a likely possibility by FY 2019. Shares in both companies ended the day higher, with that of Kate Spade rising 8%, and Coach Inc. increasing by almost 5%.

Kate Spade has had great success with the millennial customers, who have been the driving force behind the high growth rates the company has achieved. Millennials being their target market, Kate Spade has also adjusted its products to a more colorful and whimsical look, with subtle logos. Hence, an acquisition of Kate Spade would give Coach access to a younger clientele. According to RBC Capital Markets, approximately 60% of Kate Spade’s clientele are millennials, while the figure for Coach is just 35%. Furthermore, being a part of a bigger conglomerate would enable Kate Spade to cut down on its costs, and therefore boost margins. Coach has also stated its intentions of reducing the wholesale disposition and online flash sales of Kate Spade, which should ensure long term health.

Moreover, given Coach’s extensive international presence, it would put the company in a good position to “unlock Kate Spade’s largely untapped global growth potential,” according to Victor Luis, CEO at Coach. Among the growth opportunities lies China, where he further states that only 1% of the consumers can name the Kate Spade brand without prompting, while 23% can identify Coach. With 35% of the former’s stores overlapping with Coach’s locations, it also leaves room for closures in markets, in North America, where the two retailers compete, but the numbers for such are seen as minimal.

See our complete analysis for Coach here

Have more questions on Coach? See the links below:

• Is A Wave Of Consolidation About To Hit The Fashion Retail Industry?
• Cutback On Discounts Results In Bottom Line Improvement For Coach Inc.
• Coach Among M&A Speculation Yet Again
• Could Coach Inc. Be A Takeover Target?

See our complete analysis for Coach