Why Coach Is Finally a Buy

Companies and Brands

Published: February 24, 2015 2:21 pm

Coach Inc. (NYSE: COH) is in the midst of a brand transformation, according to Oppenheimer analysts Anna Andreeva and Janet Lynne Knopf. As a result the firm upgraded Coach to an Outperform rating with a $50 price target.

The fashion retailer has lost market share in North America since 2013, totaling around an estimated $500 million in lost sales. With competitor Michael Kors Holding Ltd. (NYSE: KORS) slowing in retail, that could provide opportunity to claw back some share.

At 22 times consensus earnings for the 2015 fiscal year, Coach is trading at a premium to historical values, but it is in line with margin recovery stories in the space.

In its report the firm said:

Strategy to elevate assortment resonating (bags >$400 1/3 of sales, comping positive last two quarters); while growth in core $200-$400 basket (big focus on better balance for fall 2015) should drive majority of comp improvement next year; if core comps flattish in fiscal year 2016, no other category improvement needed to reach Street expectations.

Andreeva and Knopf would detail the creative leadership in this report:

Designer Stuart Vevers (two quarters of full-price channel influence, outlet impact just beginning), we believe fundamentals are close to bottom and we are starting to see signs of brand stabilization. While we still expect full-price to lead recovery, we think more significant outlet channel (~60-70%/profits) is seeing improved traffic as elevated product with promotions pulled back is resonating. While competitive, handbag category still growing at healthy rate (estimated HSD), and comparisons ease (Coach is lapping -21% comps in North America next 4 quarters). Estimate higher interest expense on new debt $0.05 to fiscal year 2016 earnings per share (EPS); opportunity to diversify with recent Stuart Weitzman acquisition (~$0.15 to fiscal year 2016 EPS).

Coach is outperforming so far in 2015, but the stock is down sharply on a multiyear basis, roughly 50% off 2012 high of $79.70. The broad markets are now hitting multiyear highs — for example the Nasdaq is closing in on 5,000 and the S&P has leaped over the 2,100 mark.

Shares of Coach were up 3% at $42.94 Tuesday afternoon. The stock has a consensus analyst price target of $39.07 and a 52-week trading range of $32.72 to $51.00.

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