Streetwise for Sunday, August 13, 2017
On August 15, Coach will release the company’s fourth quarter and year end results. The company’s fiscal year ends at the beginning of July.
This is a company that I wrote about several years ago, prior to it falling on some difficult times. The question now is whether the future of Coach has brightened sufficiently that it might be a possible research candidate.
If you are not familiar with Coach, and I was not until my wife introduced me via my American Express card, it is a New York-based house of modern upscale lifestyle brands.
The company’s portfolio includes Coach, kate spade new york, and Stuart Weitzman. The brands, while unique and independent, all share a commitment to innovation and authenticity. The result is distinctive products and differentiated customer experiences across both sales channels and geographic markets.
The objective of Coach’s acquisition spree has been to convert itself into an American version of the European luxury conglomerate LVMH-Moët Hennessy Louis Vuitton.
This consolidation approach portends an opportunity for significant cost savings as duplicate expenses in the areas of procurement and operations are phased out. These savings directly flow to the bottom line.
With a purchase price of approximately $2.38 billion, the Kate Spade brand adds fashion house designs across a broad range of women’s and men’s apparel, handbags, accessories, and fragrance products. The acquisition is expected to save Coach about $50 million in synergies driven by inventory management, supply chain efficiencies and improved scale over the next three years.
Stuart Weitzman, a luxury shoe brand, was acquired for $574 million in 2015. The company also tried unsuccessfully merge with Burberry, the iconic British fashion powerhouse. The discussions, which took place in 2016, would have created a $20-billion fashion giant. Ultimately, talks ended with Burberry rejecting Coach’s offers.
Luxury retailers, such as Coach, learned the hard way that excessive commercialization and discounts damaged the reputations of luxury brands, and subsequently had a negative effect on sales. The result has been the implementation of turnaround plans that include brand elevation initiatives, such as a reduction of exposure within department stores, and a re-alignment of prices and inventory levels.
As the first retailer in the affordable luxury category to implement such changes, Coach’s strategic plan is to become a diversified luxury powerhouse, rather than a one-brand player.
The company’s stock trades at around $47.83 per share, which is near its high point over the past 12-months. One reason is that the Street’s analysts seem to believe Coach will grow at a faster pace over the next five years than such competitors as Michael Kors, Tiffany, Ralph Lauren and American Eagle.
Coach’s projected 5-year compounded annual growth rate for revenue and net income of 7.4 percent and 16.3 percent respectively, is well above that of its peer group. Wall Street clearly has high hopes for the company’s ability to increase its revenue base and expand margins by streamlining the operations of its various brands.
At a market multiple or P/E ratio of 25.83, appears to look a bit rich at first glance. However, the premium is likely due to the kate spade acquisition and the potential for acquiring additional brands. The Street is often willing to pay a premium for growth and corporate efficiency.
In comparison, LVMH Moët Hennessy Louis Vuitton trades at a P/E of 28.87. At a 25.83 multiple, Coach may not be considered a cheap stock but it is also not an expensive stock relative to LVMH, which traded recently $260.55.
The intrinsic value of the shares using the ValuePro.net conservative free cash flow to the firm model produces an intrinsic value of $119 per share. My earnings estimate for the 2018 fiscal year is $2.55 per share with a 12-month projected share price of $55, yielding a 10 percent capital gain, plus there is an indicated dividend of 2.87 percent.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.