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Higher price for COH is in the bag
Coach is a leading American marketer of luxury lifestyle handbags and other fashion accessories for both men and women. The firm competes with other premium apparel and accessories players like Polo Ralph Lauren, Liz Claiborne, and AnnTaylor, as well as high-end brands like Louis Vuitton, Hermes, Gucci and Prada.
Coach has historically enjoyed among the highest margins in the apparel and accessories industry. [1] [2] While Coach still boasts industry-high margins, they have declined significantly since 2007, falling by more than 6%.
We currently have a $57.04 Trefis price estimate for Coach's stock with handbags making up nearly 57% of the company value.
Expenses and Distribution Channels Weighing on Profit Margins
Historically, handbags' EBITDA margin has been ~40%. However, it declined sharply since 2007 reaching ~35% in 2010. The decrease was driven primarily by an increase in promotional activities in Coach-operated North American stores and sharper pricing initiatives, reducing retail prices, in response to consumers' reluctance to spend in a recessionary environment. Also there was an increase in selling expenses as the number of Coach-operated stores in North America, Japan and China increased.
Another factor that has contributed to the decline in profit margins was the decline in the share of department stores & other retailers revenues as a percentage of total division revenues. As department stores & other retailers have higher EBITDA margin than Coach stores, this resulted in lower EBITDA margin for the division.
While we forecast Coach handbags' margin to decline in the near future and then stabilize at around 32%, different margin scenarios could have significant impact on Coach' stock.
Upside Scenario
We estimate that if Coach increases its EBITDA margin by 2% annually reaching its historical level of 40% by 2013 before stabilizing, there could be an upside of 15% to our $57.04 Trefis price estimate for Coach stock.
Below are some of the factors that we believe could help Coach improve its margin:
Decrease in operating expenses
We believe Coach could cut down its operating expenses as efficiencies of scale are established in addition to better profitability from heavy investments relating to its expansion in international markets. (See Growth in Addressable U.S. Market Can Lift Coach) Greater control over the business, as a percentage share of Coach store sales increase, will allow Coach to allocate fixed portion of SG&A expenses to larger sales base. (See Outlook for Coach's New Store Openings)
Improved product mix
With the improvement in economic conditions, Coach's full-priced sales increased in 2010 resulting in higher handbags EBITDA margin for 2010. Going forward, we could see handbag margins continue to improve if economic improvement translates to more full priced sales and higher priced bags.
Downside Scenario
Increase in share of Coach store revenues as a percentage of total revenues
Coach has increasingly focused on increasing Coach store revenues as a percentage of sales as this channel provides greater control over its business. We expect Coach store revenues as a percentage of total division revenues will continue to increase, though at a slower than historical rate, as Coach continues to emphasizes its own stores.
As the profit margin margin for Coach-operated stores are significantly lower than margins for department stores & other retailers sales, an increase in Coach store revenues as a percentage of total revenues will lead to a decline in handbags EBITDA Margin.
You can drag the trend lines above to see the impact of various handbag EBITDA margin scenarios on Coach's stock
See the full analysis for Coach.
Notes:
- Highest Gross Margin in the Apparel, Accessories & Luxury Industry Detected in Shares of Coach, SmarTrend [↩]
- Coach is Among the Companies in the Apparel, Accessories & Luxury Industry With the Highest Operating Margin, investors.com [↩]
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