The Risks And Threats Inherent In Coach’s Business Model
Premium Brand Power: An Investor's Guide To Coach (Part 24 of 24)
Competitive threats
Coach, Inc. (COH) operates in the fast-paced and dynamic fashion industry. Its design decisions are critical. These calls can significantly impact the company’s revenues and earnings. Due to the fragmented nature of the industry, Coach also faces stiff competition from other industry players, notably Michael Kors (KORS), Tory Burch, Ralph Lauren (RL), and Kate Spade (KATE).
Macroeconomic headwinds
In the near term, the company is also prone to macroeconomic risks from its overseas operations. Currently, Asia and Europe are key growth drivers for the company. Coach and other companies with significant operations abroad will be subject to headwinds resulting from an appreciating US dollar and low and negative growth in these economies, notably the Eurozone, Japan, and China.
As Coach’s products are classified as consumer discretionary (XLY) goods, economic growth, employment, and consumer confidence are critical indicators for the company.
Newer entrants Michael Kors (KORS) and Kate Spade (KATE) derive over 80% of their revenues from the North American market and will be relatively immune to these factors. Coach and Ralph Lauren, on the other hand, derive ~40% and ~33% of their revenues, respectively, outside North America. The impact of these factors is likely to be greater as a result.
Global sourcing risks
Since most manufacturing takes place outside of the US, Coach is subject to delays in receiving its merchandise. An ongoing West Coast port dispute is putting the company at risk in this regard. The International Longshore and Warehouse Union—a group that represents West Coast dock workers—and the Pacific Maritime Association—which represents shippers—have been locked in a bitter contract dispute since July, 2014. Shipment offloading has slowed as a result.
The National Retail Federation and the National Association of Manufacturers estimate the loss to the GDP (gross domestic product) from a shutdown at major West Coast ports such as Los Angeles, Seattle, Portland, and San Francisco could run to ~$1.9 billion per day.
Execution risk
Coach’s future returns to shareholders hinge on its ability to successfully execute its transformation plan and reverse the decline in its same-store sales. Success is critical as the company makes fresh investments (~$570 million) in new and existing retail stores and factory outlets. Turnaround is expected to come about in fiscal year 2016–2017. But in the near term, investor opportunities for significant returns appear remote.
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