Coach Inc.’s Stock Plunges On Its Full Year Earnings Announcement

Shares in Coach (NYSE:COH) took a nosedive once the company released its fourth quarter and full year (year ended June 2017) earnings. Mixed fourth quarter results, coupled with a disappointing FY 2018 guidance, can be said to be the cause for the stock plunging 15.2%. Highlights of the quarter included double-digit growth in the net income, solid international sales, particularly in China and Europe, and improving comps in the domestic market. In a bid to boost its luxury image, the company has pulled back its level of merchandise from department stores and cut back on its discounting. These factors pressured the sales of the company, but improved comparable sales and increased e-commerce revenues in the US helped to offset it. Excluding the additional week in Q4 2016, the revenues for the company would have actually increased by 6% as reported, and 7% at constant currency.

Coach 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 into a new luxury format, ending the year with just over 720 store renovations.
• The retailer has also recruited Selena Gomez to be their new face, in order to appeal to the younger shoppers.
• Furthermore, Coach has rationalized its department store distribution, taking its door count down by 25%, to just over 750 by year end.
• Promotional events in the channel, in terms of days on sale, were reduced by 35% for the year.

Kate Spade Acquisition To Boost Sales But Slump Margins

• The acquisition of Kate Spade is expected to give a nice bump to Coach’s revenues in FY 2018, with modest organic growth of low single digits to be boosted by $1.2 billion of revenues from the newly acquired company.
• Kate Spade has had great success with millennial customers, who have been the driving force behind the high growth rates the company has achieved.
• Approximately 60% of Kate Spade’s clientele are millennials, compared to just over 30% for Coach. Hence, this acquisition would give Coach access to a younger clientele.
• Furthermore, the brand has significant potential to grow internationally, where it does not have much of a presence. One key market identified has been Japan, where the brand is present currently, but is underpenetrated. Growth opportunities also exist in markets such as China and Europe. Coach expects 20 to 25 net openings for Kate Spade in FY 2018.
• Coach will be curtailing the number of surprise sales and pulling back on the wholesale channel for the Kate Spade brand, similar to the steps it has taken for its eponymous brand.
• However, this good news is accompanied by the fact that operating margins of Coach are expected to be pressured as the company carries on with the integration.
• Revenue growth is projected to increase by 30%, while operating income growth is slated to come in at 22% to 25%.
• Elevated expenses will only be partially offset by savings from the merger, resulting in a 10% to 12% growth in the earnings.
• Meanwhile, consensus expectations were calling for earnings of $2.49 per share, on revenues of $6.044 billion.

Industry Trends To Impact Brand Performance

• An uncertain macroeconomic environment is bound to impact the performance of the company. A strong dollar will negatively impact tourist inflows, while geopolitical events are having an adverse effect on sentiment.
• Business with international tourists in North American stores was down marginally in the quarter, negatively impacted by a fall in Chinese tourist traffic, partially offset by improvement in customers from other nationalities such as Japan and Korea.
• In the June quarter, the North America premium women’s and men’s handbag and accessories market was essentially flat, negatively impacted by the trends in the department store space, including the pullback by brands such as Coach.
• Growth in the international premium handbag and accessory category accelerated in the year, and was up by mid-single digits, positively impacting the performance of Coach on a global level.
• The above-$400 price continued its penetration, and now represents over 45% of the handbag sales, up from about 40% in the prior year period.
• The men’s category grew faster than the women’s in FY 2017, similar to FY 2016. The men’s sales now total $840 million, and has the potential to be a billion dollar opportunity for the company.

See our complete analysis for Coach here

Have more questions on Coach? See the links below:

• Consolidation Continues In The Luxury 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