Retail figures in the United States have been upbeat recently, as consumers have defied factors such as the sequestration and have been opening up their wallets again. Despite this uptick, developed retail markets are quite highly saturated, which is why many retailers are looking toward Asia to sustain growth. Coach , which reported earnings this week, has been expanding rapidly in China, and surpassed the analyst consensus. It appears as if the company’s efforts to become a global lifestyle brand are paying off.
Brand Transformation and Revenue Growth
This week, the company reported sales of $1.19 billion for the quarter, compared to $1.11 billion in the same period a year ago, a 7% increase year on year. EPS for the quarter came in at $0.84, versus a consensus of $0.81, for a 10% increase from the previous year.
Investors welcomed the news, sending the stock up some 13% before the bell. The firm also announced a dividend increase of $0.15 to an annual rate of $1.35.
The company has been working hard on transforming the brand from a ‘handbag company’ to a global lifestyle name, expanding its range of accessories and maintaining a focus on menswear and growth in the digital realm. According to CEO Lew Frankfort, who will step down at the end of the year, the company has been making good progress with these initiatives, expanding its creative team, and is seeing these efforts pay off. Menswear has been growing rapidly, up 50% globally. Despite a small increase in SG&A expenses, the firm managed to raise its gross margin by 35 basis points.
Asia especially has been growing very quickly in terms of sales. China has been a main factor in propelling the company’s revenue growth, with sales in the country up a massive 40% and comp sales growing at double-digit rates.
Coach opened its 100th location in mainland China this quarter, and now has a total of 118 stores in the region. International sales contribute roughly a third of the total. While growth in North America was less spectacular, it was nevertheless quite strong with a 7% sales increase and comp sales up 1%.
Coach’s key competitor is Michael Kors Holdings , a Hong-Kong based accessories retailer, which has also been growing very quickly especially in China. According to some commentators, Kors is increasingly being viewed as a trendier and more fashionable alternative to Coach, which is regarded as having more of a classic style. Kors is working on chipping away at Coach’s market share, and is expanding very rapidly, not only in China, but also in Coach’s backyard market of North America.
Some years ago, Coach had few major competitors to worry about. Now, as the lifestyle and accessory market is heating up worldwide, it has a number of new names to deal with, including Tumi Holdings . This company, which had its IPO last year, produces a range of trendy travel accessories, a space in which it competes with Coach’s offerings. Analysts expect the company’s bottom line to grow from $0.75 in 2012 to $0.87 in 2013. While the company does not as of yet pose a serious threat to Coach, it is a good example of a newer company trying to enter the global lifestyle market.
Valuations and Metrics
Coach looks more or less fairly valued at the moment. The stock trades at around 14 times trailing earnings, which is on par with the industry average. To compare, Kors trades at around 30 times earnings and Tumi at about 37 times.
Coach has a great operating margin of 31% and a stellar return on equity of over 53%. The company has barely any debt and around $850 million in cash on its balance sheet. While not a bargain at the moment, Coach is definitely trading at a discount to competitors.
The Bottom Line
Coach is working hard on transforming its brand and image, and appears to be doing a good job. In any case, the company’s products are catching on fast in China, which is seeing spectacular top line growth. While competition is heating up, with new names emerging to challenge the company’s market share, the company’s most recent results indicate that it is still able to grow revenues and maintain its focus on expansion and product development.
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