Coach Finds Success in

Selling More Expensive

Handbags
By PHIL WAHBA
January 31, 2017

Coach (COH) appears to be doing the nearly impossible in retail: the brand is
winning back its upscale reputation.

The leather goods maker on Wednesday reported a 3% increase in comparable

sales in North America in the quarter ended Dec. 31, the third straight quarter
of growth. It managed that feat despite a tough environment for many
retailers, particularly department stores, by selling pricier handbags.

Coach only emerged a year ago from a major two-year slump that saw
comparable sales in North America, its largest market, fall by 20-plus percent
in several quarters, hurt by too big a focus on promotions, confusion in
customers’ mind about what was sold at its nicer full-service stores compared
to its outlets, and a reputation for always being on sale. The endless rebate
signage at key distributors like department store chain Macy’s(M, +2.89%),
only enforced that problem.

But in the quarter ending Dec. 31, which included the key holiday season,
handbags costing $400 or more generated 50% of sales, up 20 percentage
points from a year earlier. Leading the charge: its pricier runway-inspired
Coach 1941 collection where prices range between $295 and $1,500. And the
best selling bag at Coach in some recent months has been the $795 Rogue, a
price the company can now get away with charging now that its upscale cred is
on the mend.

“That’s a bag that a year ago, we wouldn’t have had permission to sell,” Coach
President of North America and Global Marketing Andre Cohen
told Fortune in an interview.

Coach has helped restore its upscale aura by cutting down drastically on
online flash sales (indeed, its e-commerce sales declined as it continues to
wean shoppers off those deals)

>exiting 250 U.S. department stores (out of 1,000 in all) by summer,

presenting its fashions at runway shows and remodeling most of its own
stores. It also recently signed on celebrity and tastemaker Selena Gomez to be
its brand ambassador. And the New York-based company has also opened
lavish flagship stores on Manhattan’s Fifth Avenue and London’s Regent
Street. In addition, Coach has more clearly delineated the assortment at its
full-line stores compared to its outlets and given store workers far more
training.

“All of that has led to improved perceptions around the brand,” said Coach
CEO Victor Luis in an interview. Earlier, he told investors on an analyst call
that fewer consumers viewed the brand as being discount driven now than a
year ago, citing company data.

Still, Coach’s total sales remain well below the pre-meltdown levels but profit
is up: the company reported a 17.4% rise in quarterly profit with net income
hitting $199.7 million. Net sales rose to $1.32 billion from $1.27 billion, in
line with Wall Street expectations.
And all the while, rivals like Michael Kors (HORS) and Kate Spade (KATE,
+0.00%) are only now beginning to address the same problems that plagued
Coach a few years ago.

Coach Bags Double-Digit Overseas Growth

As Quarterly Figures Shine
Coach sales grew by more than 10% in the most recent quarter, driven by
expanding sales in North America and China.

Coach made $221.4 million, 77 cents a share, on $1.16 billion in sales in its fiscal
quarter. That's up from last year's $215 million, 73 cents a share, on $1.01 billion
in sales. Also, it surpassed analysts expectations of 76 cents a share in profit on
$1.16 billion in sales.

Coach shares rallied 3.8% to $56.24. Luxury goods retailers, once praised for
their nearly universal ability to grow through the recession, have posted uneven
results in past months, sending mixed signals about the strength of the wealthy.
Coach competes with businesses like Ralph Lauren, Tiffany, V.F. Corp and Fossil.

Looking ahead, Coach CEO Lew Frankfort says the company remains "well
positioned for the holiday season." Coach also announced a $1.5 billion share
buyback program, implying that Coach believes its shares are cheap. The stock
trades at 15 times estimates of this fiscal year's earnings and 13 times next year's.
It comes after Coach's launch of its Legacy collection, one of its largest roll-outs
in years.

Sales at established international locations rose 15% to $362 million. Growth was
driven most by a 40% jump in Chinese sales. Revenue at stores open at least 13
months, same-store sales, is a widely used measure of retailers because it strips
away volatility from newly open or closed stores.

Revenue at U.S. locations rose 8% to $784 million. "We believe the acceleration
in U.S. sales will allay fears that the Coach brand is losing momentum," says
Nomura retail anlayst Paul Lejuez. Coach has shifted toward more factory stores,
which sell goods at lower prices than traditional locations, and introduced
coupons to match an increased in promotion among retailers. "Given the negative
sentiment in that stock," stemming from a worry about the luxury sector, says
Lejuez, "today's report is enough to move the stock higher."

Handbag maker Coach

posts first sales growth in
10 quarters
(Reuters) - Handbag maker Coach Inc’s COH.N revenue rose for the first time in 10
quarters, helped by strong sales of its Stuart Weitzman-branded shoes and sustained
growth in China, where the company managed to shake off the effects of a slowing
economy.

Coach’s strong showing in China comes at a time when luxury companies

such as BMW (BMWG.DE) and LVMH (LVMH.PA) are struggling to
sell their wares to consumers who are tightening their purse strings.
Nike Inc (NKE.N) and Burberry Group Plc (BRBY.L) are among the few
brands that have managed to report sales growth in China, where the
economy last year grew at its slowest pace in 25 years.
“In the long term, China remains the single largest opportunity for growth
outside of North America,” Chief Executive Victor Luis told Reuters.

“Even here in the U.S., we have seen sales to Chinese consumers

continue to increase. All of this points to strong demand from the
mainland Chinese consumer both at home and overseas when they
travel.”

Total China sales rose 2 percent in the second quarter ended Dec. 26.
Excluding Hong Kong and Macau, which continued to be laggards, China
sales rose at a double-digit percentage rate.

Coach’s strong performance in China and Europe underlines the premium

status of the Coach brand across regions where it is not yet a mature
 brand and is not seen as ubiquitous, Conlumino retail analyst Håkon
Helgesen wrote in a note.

Bayerische Motoren Werke AG86.72

BMWG.DEXETRA
--(--%)

 BMWG.DE
 LVMH.PA
 NKE.N
 BRBY.L
China accounted for nearly 15 percent of Coach’s total revenue in the
fiscal year ended June, 2015.

The company, founded in a Manhattan loft in 1941, said sales from

international markets rose 4 percent to $437 million.

Sales at Stuart Weitzman, which Coach bought last year, came in at $94
million. Net sales rose 4.5 percent to $1.273 billion.

Sales at established stores in North America fell 4 percent, including

online sales, less than the 4.1 percent decline analysts had expected,
according to Consensus Metrix.
 Net income fell 7.3 percent to $170.1 million, or 61 cents per share.
Excluding items, the company earned 68 cents per share.

Analysts on average had expected a profit of 66 cents per share and

revenue of $1.276 billion, according to Thomson Reuters I/B/E/S.

Coach, Inc.: A Quick SWOT Analysis

Justin Hellman | October 03, 2016

Coach (COH) stock, trading in the same range (mid-$30s) that it was in early 2010, has had a rough
decade thus far. In fact, annual share earnings, at around the $2 mark, are tracking below the levels
witnessed back then, an indication of just how much luster the brand has lost and how challenging the
retail landscape has become. The company, best known for its fashionable leather goods, has struggled
in the highly promotional department store channel, and has faced intense competition from the likes
of Michael Kors (KORS) and Kate Spade (KATE). It also, for a time, came to rely too much on
discounting, which weighed heavily on the operating margin. Nonetheless, Coach, behind CEO Victor
Luis (he took the reins in January of 2014), has begun to stage a comeback over the past year, supported
by store remodels, upgrades to its handbags and accessories lines, efforts to curtail discounts, and its
successful acquisition of designer footwear maker Stuart Weitzman. And the shares, up about 10% in
2016, have finally started perking up, much to the delight of patient bulls. So, is this established retail
brand still an attractive buy-and-hold candidate? Or has the valuation already gotten too rich, particularly
in view of the macroeconomic uncertainty in Europe and elsewhere? In this brief article, we will attempt to
address these questions by taking a closer look at Coach’s business and performing an easy-to-follow
SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.

The Business
Coach, Inc. is a leading New York design house of modern luxury accessories and lifestyle brands. The
retailer was established in New York City in 1941 (the current company was incorporated in Maryland in
2000), and has a rich heritage of pairing exceptional leathers and materials with innovative design. Stuart
Weitzman, acquired in 2015, is a leader in women's designer footwear, and is built upon the concept of
crafting a beautifully-constructed shoe, merging fashion and function. In fiscal 2016 (ended July 2nd), the
top line totaled $4.5 billion, of which 53% was from Coach brand sales to North American customers and
8% was from the new Stuart Weitzman label. Apart from sales online and via the lower-margined
wholesale channel, the company markets goods through its own unit base, consisting of 432 domestic
locations (204 are outlet stores) and 522 international ones. Women’s handbags are by far the largest
product category, accounting for a little more than half of the revenue mix.

Strengths
Strong Brand: Though discounting and overexposure may have tarnished Coach’s image a bit in recent
years, allowing glitzier upscale rivals to make inroads, the iconic leather brand, now celebrating its 75th
anniversary, remains a heavyweight in the attractive luxury retail category. Moreover, the new CEO, who
has brought in new designers (Stuart Vevers has been a hit in the creative director role), seems to be
doing a good job of breathing life into the label, combining traditional craftsmanship elements that first
made Coach a household name with fashionable, modern accents.
Indeed, these merchandising initiatives, and an emphasis on an “American luxury” aesthetic that has
been missing from the market, already look to be paying off, with North American comps rising 2% and
overall sales climbing an impressive 15% during the company’s fiscal fourth quarter. (This was the first
positive same-store sales performance in many periods.) And we expect the momentum to persist in the
year ahead, bolstered by operational improvements and an elevated brand perception at home, as well
as by advances in China (it should soon be a $600 million business) and Europe (this region is still in an
early-development phase).
Diverse Distribution Model: Coach’s products are available anywhere a consumer chooses to shop, from
its own retail and outlet locations, to its website, to department and specialty stores worldwide. This adds
an element of diversity to the business, since results are not contingent on the health of any single
distribution channel or geographic area. It also helps the company maintain high brand awareness and
penetrate all corners of the retail landscape.
Good Finances: Despite its past troubles, Coach has maintained decent free cash flow and a sound
balance sheet. Even when factoring in the added leverage taken on the balance sheet as part of the
Stuart Weitzman transaction, the debt-to-capital ratio remains a moderate 24% (as of July 2nd). Plus,
cash reserves, bolstered by a just-completed sale-leaseback of a key facility, are an ample $1.3 billion,
suggesting that the company has more than enough flexibility to pursue further accretive acquisitions,
push unit development, continue to invest in product innovation and store remodels, and step up its
marketing efforts. Annual dividend hikes are a likelihood, as well, which should ensure that COH shares
remain among the handful of core retail holdings that tend to be most prized by individual and institutional
investors.

Weaknesses
Department Store Exposure: The company still does a significant amount of business
with Macy’s (M), Dillard’s (DDS), Nordstrom (JWN), and other large North American department store
chains. Though it offers the brand exposure to another consumer sect, it has not been a blessing in
recent years. The department store channel is no longer favored by today’s young consumers that appear
more comfortable shopping online or in smaller boutiques, and has been mired in a prolonged slump.
Department stores have become more promotional, too, often resorting to storewide sales to lure
customers, which has pressured Coach to discount its goods more than it would prefer. Going forward,
the company seems committed to moving beyond discounting and, to some degree, cutting ties with
these struggling mass merchants. To this end, Coach has indicated that it will consider pulling goods out
of some department stores in an effort to protect its brand. It also announced plans to cut wholesale
doors by as much as 25% and sharply limit the number of markdown allowances. This may hurt the top
line over the next few quarters, but it ought to be a major plus over the long term.
In the meantime, we think that the outlet channel will also be deemphasized over time, with the company
instead focusing its resources on full-priced stores where it attracts more affluent customers and can
command a premium for its products. Outlet distribution, though exceeding sales via department stores of
late, has long since been a growth engine for Coach. And outlets do little to elevate the brand, which is
now the company’s No. 1 goal.
Reliance on Handbags: Women’s handbags represent a little more than half of the sales mix. This is a
large addressable market globally, but it’s grown more competitive over the past decade, with aggressive
players like Michael Kors and Kate Spade arriving on the scene. Consequently, some product
diversification would be welcome here, a proposition that appears to be shared by management. This, we
think, partially explains the blockbuster Stuart Weitzman deal. And we would not be surprised to see
further actions on the M&A front, especially in footwear, as Coach looks to fill out its product portfolio.

Opportunities
Footwear: Coach made a foray into the huge, high-volume footwear market early last year when,
notwithstanding its historic preference for organic growth, it bought luxury shoemaker Stuart Weitzman for
$574 million in cash. The Weitzman brand, marketed in 70 countries worldwide and through standalone
shops in the U.S. and Europe, resides at the high end of the luxury food chain, with devotees to the label
including dignitaries like Kate Middleton and actresses like Jennifer Lawrence. And, thus far, the
acquisition has been the homerun that Coach had hoped for. Stuart Weitzman sales have been brisk,
particularly for classic styles, such as “Nudist” sandals and up-to-the-knee boots, both of which retail at
price points well in excess of $300. And the brand, now under the leadership of Wendy Kahn (a veteran
of Valentino, USA), has bestowed on the company a certain “cool” factor that had long been absent.
Overseas Extension: While things are gradually turning around at home, advances abroad, where Coach
is underpenetrated relative to other iconic American labels, remain a priority. The Asia/Pacific region,
notable for the double-digit sales increases being registered in Mainland China, is becoming a greater
catalyst for growth. And the stage is being set for solid expansion across Europe in fiscal 2017 and
beyond. Coach has had a checkered history in Europe, where uneven execution and stiff competition
from entrenched luxury brands (e.g., Gucci, Prada, Louis Vuitton) have undermined past development
attempts. The company seems to have learned from its mistakes, however, and should be able to
generate steady sales gains in places like France, the U.K., and Spain, where tourists from China and
elsewhere are eager to snap up luxury Western brands.
Licensing: Coach does license its brand in select noncore categories, like eyewear, watches, and
fragrances. These activities take in very little revenue at present (just $29.7 million in fiscal 2016),
however. Nonetheless, licensing chances should be plentiful in the years to come, especially as the
company endeavors to expand overseas and move its brand back toward the high end of the retail
ladder. Indeed, this could be another big growth area for Coach, and one that requires very little in the
way of capital investment.

Threats
Strong Dollar: Tourist spending drives a lot of North American sales, as it does for other luxury retailers,
like jewelry king Tiffany (TIF). As such, a strong greenback relative to the euro and other leading
currencies, which is mostly what we’ve had lately, tends to have negative consequences for the top line.
Coach tries to minimize these headwinds with hedging strategies, as well as its global growth initiatives.
But the U.S. dollar will probably continue to have a considerable effect on domestic traffic trends.
Uncertainty Overseas: As Coach evolves into more of an international retailer, it faces more operational
challenges (it had to diversify its supply chain and engage in more forex hedging) and must bear the risk
of macroeconomic volatility. Thus, the company’s results may be hampered by a host of macro events,
from a sharper-than-anticipated economic slowdown in China to further currency woes in Brazil. A
weakening across the euro zone, which has been feared in the wake of the U.K.’s surprise Brexit vote,
could also thwart results at Coach, though the company has been doing quite well in that region, and
exposure there remains relatively low.

Conclusion
All in all, we believe that Coach’s strengths and opportunities outshine its weaknesses and threats. The
business, in transition since Victor Luis took occupancy in the corner office, clearly looks to be at an
inflection point after years of difficulties, and we envision steady, if not spectacular, growth ahead, as the
company better controls overhead costs, makes inroads abroad, focuses more on product design and
innovation, and repositions the brand near the top of the luxury pyramid. The shares, meanwhile, look
reasonably valued compared with some frothy parts of the stock market, trading at roughly 17 times Wall
Street’s consensus earnings estimate for fiscal 2017. And they offer a nice dividend yield (in the
neighborhood of 3.7%), which is especially appealing in this low interest rate environment.