Kate Spade Acquisition To Boost Coach Inc.’s Sales But Slump Margins

Coach (NYSE:COH) is set to announce its first quarter (three months ended September 2017) earnings on November 9, and it will mark its first earnings since its name change to Tapestry Inc. was announced. While a growth in revenues is anticipated, margins are expected to remain pressured, resulting in a fall in its earnings. The acquisition of Kate Spade will give a boost to the sales of the company; however, its ongoing integration will have a negative impact on the operating margins. Macroeconomic factors also play a part in 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 June quarter, negatively impacted by a fall in Chinese tourist traffic, partially offset by an improvement in customers from other nationalities such as Japan and Korea. This trend is expected to continue in this quarter as well. Meanwhile, the international stores are expected to drive the revenue growth for Coach this time around as well.

We have a $51 price estimate for Coach Inc, which is over 20% higher than the current market price.

Kate Spade Acquisition

• 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 the 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 its wholesale channel for the Kate Spade brand, similar to the steps it has taken for its eponymous brand.
• However, all 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.

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 (12 months ended June 2017) 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.
• Coach has also 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.

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.
• Why Are We Bullish On Coach Inc.?

See our complete analysis for Coach