Coach Marching Ahead of the Industry: What's Behind Rally?
Despite the prevailing headwinds in the current retail landscape, Coach, Inc. COH has exhibited a bullish run in the index in the past three months. We noted that in the said period, the stock has not only outperformed the Zacks categorized Textile-Apparel Manufacturing industry but also the broader sector. The stock has increased 20.2%, while the industry advanced 1.6%. Meanwhile, the broader Consumer Discretionary sector gained 4.7%.
Coach has undertaken transformational initiatives revolving around products, stores and marketing to pull itself back on the growth trajectory and emerge as a multi-brand company. The company’s long-term earnings growth rate of 10.6% also reflects inherent potential.
Growth Drivers
As one of the leading American marketers of fine accessories and gifts, Coach boasts a proven strategy of investing in stores to enhance sales output through product innovation, a compelling pricing strategy, new merchandise assortments and a cost-effective global sourcing model. We believe that these strategies will help drive comparable-store sales and operating margins in the long term. The company’s growth drivers include expansion of global distribution model and venturing into under-penetrated markets.
Coach is undergoing a brand transformation and is introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman has been accretive to performance and is being viewed as a significant step in its efforts toward becoming a multi-brand company. The recent agreement to acquire to Kate Spade & Company for $2.4 billion is another step taken in that direction. Additionally, the company is aggressively expanding eCommerce platform.
The company’s strategic endeavors helped it post 13th straight quarter of positive earnings surprise when it reported third-quarter fiscal 2017 results. Moreover, Coach registered positive comparable-store sales at its North American segment for the fourth straight quarter. Moreover, the company witnessed healthy growth across directly-operated Europe and Mainland China operations. Management continues to project double-digit growth in earnings per share during fiscal 2017. Further, the company expects operating margin between 18.5% and 19% for the fiscal year.
Obstacles
Due to strengthening of the U.S. dollar, management now envisions low-single digit increase in fiscal 2017 revenue. Third-quarter net sales came in at $995.2 million, down about 4% on a reported basis and 3% on a constant currency basis. Sales growth were hurt by 150 basis points on account of management’s efforts to elevate the Coach brand’s positioning in the North American wholesale channel by lowering promotional events and door closures. We noted that the top line fell short of the Zacks Consensus Estimate of $1,018 million, marking the third straight quarter of revenue miss.
Coach sells products that are discretionary in nature, and in turn depends upon consumers’ disposable income. The company’s customers remain sensitive to macroeconomic factors, which if not favorable may negatively impact their discretionary spending, and in turn the company’s growth and profitability.
Given the pros and cons embedded, the stock currently carries a Zacks Rank #3 (Hold).
Stocks that Warrant a Look
Investors may consider better-ranked stocks such as Best Buy Co., Inc. BBY, Big 5 Sporting Goods Corporation BGFV and The Children's Place, Inc. PLCE all flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Best Buy delivered an average positive earnings surprise of 33.8% in the trailing four quarters and has a long-term earnings growth rate of 11.8%.
Big 5 Sporting Goods delivered an average positive earnings surprise of 94.5% in the trailing four quarters and has a long-term earnings growth rate of 12%.
Children's Place delivered an average positive earnings surprise of 36.6% in the trailing four quarters and has a long-term earnings growth rate of 8%.
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