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Coach Inc.
Exchange: NYSE
Peter Blicharz Lead Analyst pblicharz@theowlfund.com
RECOMMENDATION
COH
BUY
$54.63 $68.17 27.28%
Ticker: COH
Bryan Murray Associate Analyst bmurray@theowlfund.com
Market Data
52 week trading range Shares Outstanding ($mm) Market Capitalization ($mm) Enterprise Value ($mm) 45.87-63.13 281.33M 15.26B 13.80B
COMPANY OVERVIEW
Coach, Inc. designs and markets bags, accessories, business cases, footwear, wearables, jewelry, sunwear, travel bags, watches, and fragrances for women and men in the United States and internationally The company also offers fragrances comprising of perfume spray, toilette spray, purse spray, body lotion, and body splashes for women; and fragrances for men. Coach, Inc. markets its products to consumers through a network of companyoperated stores in North America, Japan, Hong Kong, Macau, Mainland China, Taiwan, Malaysia, Korea, and Singapore, as well as through Internet, department stores, and specialty stores. The company sells its products to wholesale customers and distributors in approximately 25 countries. As of June 29, 2013, COH operated 351 retail and 193 factory leased stores located in North America; 191 coach-operated department store shop-in-shops, retail stores, and factory stores in Japan; and 281 coach-operated department store shop-in-shops, retail stores, and factory stores in Hong Kong, Macau, Mainland China, Singapore, Taiwan, Malaysia, and Korea.
Financial Data
Cash & Equivalents Debt ($mm) 1.13B 985.00K
Revenue (mm)
$8,000 $6,000 $4,000 $2,000 $11 12 13 14E15E16E
Earnings History
Earnings Date FY13 Q4 FY13 Q3 EPS .89 .84 1.23 .77 Revenue $1.22B $1.19B $1.50B $1.16B Price -7.87% 9.8% -16.36% 7.35%
INVESTMENT THESIS
From its IPO in 2001 until 2007, COH traded as the hot new handbag company. However, going into 2008, the company lost its level of inelasticity with the higher end customer. Through this loss of market share in their largest segment, they have begun trading at a discount to their handbag and luxury competitors half way through 2012. However, thanks to their industry leading margins, COH is able to begin their transition to a lifestyle brand thanks to their expansion into mens products, high end leather offerings, and international expansion. COH will also be trading at a multiple that mirrors their lifestyle brand competitors moving forward. Therefore, entering a position in COH at this price marks a significant opportunity for the fund considering the companys industry leading margins, transition from a premium apparel, accessories & luxury goods to a Lifestyle brand and their expansion into international markets of Europe and Asia.
Consumer Discretionary/Staples
FY13 Q2 FY13 Q1
All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via CapIQ, Bloomberg and other vendors. The William C. Dunkelberg Owl fund does and seeks to do business with companies covered in its research reports. Thus, investors should be aware of possible conflicts of interest that could affect the objectivity of this report.
Strengths
Expanding presence in China o FY13 sales rose 40% (11% of Rev.) o 25% growth for FY14 o Customer intent to repurchase remains at a minimum of 80%. o 6% market share as of FY13 North America o 20 new stores in FY14, including 2 full priced locations and minimum of 15 factory outlets with 1 free standing mens store in addition to their 351 retail and 193 factory leased stores already; that account for $3334.48M of rev. o Beyond FY14, COH plans to have 500 stores in N.A. and 30 in Canada Japan o FY14, 5-10 net new locations which would equal square footage growth to increase by a minimum of 3% and expanding revenue. o Japan is responsible for 15% of revenue in FY13. o 17% market share = 2nd highest market share in the country Joint ventures with international partners in Europe o At the moment, 20 locations in U.K., France, Ireland, Spain, and Portugal account for $40 million in annual sales as of FY13. o Meant to increase their exposure to department stores and increasing their indirect sales. o 80-100 Coach specific stores openings planned for FY14: 70 wholesale and 10 retail locations. o Possibility of 20% of global category sales if COH penetrates the market successfully.
Drag Factors
Revenue Breakdown
Japan 15% Other Internati onal 19%
Sales shortfalls due to a sharp decline in global consumer spending Increased competition in core markets o Missing trends o Fashion Risks Counterfeiting Currency fluctuations may result in a gain or drag upon conversion to US Dollars. o Mid-single digit sales growth in constant currency. o Assuming Yen to close to 100 Dependence on independent manufacturers for procuring merchandise Sourcing activity is a key point for Coach as 69% of their sales are generates by new products.
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Target Price
To arrive at our relative value fair price we first computed the NTM P/E values for each of the companies in our comp group. Although our median P/E multiple came out to be 19.4x, we decided to stay conservative and use the mean multiple of 17.8x with COHs NTM EPS of 3.83 to arrive at our target price of $68.17. Peer Analysis Target Price= $47-$73 Relative Valuation Target Price=$68.17 Relative Target Multiple= 17.8 NTM Forecasted EPS= 3.83
VF Corp. (VFC) Fossil Group, Inc.(FOSL) Ralph Lauren Corp. (RL) Coach, Inc (COH) Median Mean
Company
Implied P/E
NI Margin LTM
Tiffany and Co. (TIF) Vera Bradley (VRA) Michael Kors (KORS) Coach, Inc (COH) Median Mean
15.5
5.8 14.0
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FINANCIAL ANALYSIS Sales: Revenues in FY13 increased by 7%. Coachs sales in China exceeded $430 million, which is up 40%, ending the year with about 126 locations including over 100 on the Mainland. Mens business grew almost 50% in FY13 to about $600 million. And online sales grew strongly with double digits. FY13 sales came in at $5.08B which resembles a 7% increase YoY. North America sales were $3.334B, while international markets brought in approximately $978M in sales and Japan $760M in sales. Looking forward, COHs strategy is to increase sales of their mens business to $1B in the next three years as they achieved $600M this past year. Keeping in mind, COH posted a 4% increase in local currency in Japan despite the top compare, white dollar sales which declined 15% reflecting the weaker Yen. With the re-launch of Madison in FY14 Q1, the company is expecting a steady growth in sales similar to last years and moving forward into the holiday season. Balance Sheet FCF: Cash flow continues to be something Coach is able to strive with. Thanks to an industry leading 7% FCF yield, The Company was able to grow their cash balance another 23% in F13 to just over $1.1B. The company is looking to use this cash balance to continue their expansion of new stores in Europe and Asia. Dividend: COHs cash balance also allows them to continue to pay out 2.5% dividend which is significant in comparison to their competitors and the rest of the discretionary industry. Coach has also made extended efforts to grow their dividend 40% over the last 3 years. Considering the significant cash balance and no other mention of cash usage besides growing their current stores, the growing dividend trend should continue.
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Margin Analysis Once again, Coachs old operations and their new directions must be considered. In both comparisons, they have a considerable advantage to that of their competitors. First, in the luxury segment, their 73% Gross Margin does not see other competitors reaching anything close. The closest competitor is Michael Kors at a 60% margin. This also continues across net Income margin (200 bps advantage) and EBIT margin (150 bps advantage). The trend then carries over in comparison to their new lifestyle brand comparisons. In Gross Margin, the next closest competitor is Ralph Lauren at a margin of 59.5%. But Coach also keeps considerable advantages in Net Income Margin (800 bps advantage) and EBIT margin (roughly 14% advantage). While Coachs margins may be adversely affected going into a lifestyle business that could end up having lower price points than the company is used to, the vast and efficient distribution network that Coach has in place should allow a shift that does not squeeze margins to any considerable degree.
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DISCLAIMER
This report is prepared strictly for educational purposes and should not be used as an actual investment guide. The forward looking statements contained within are simply the authors opinions. The writer does not own any of the Coach Inc., company stock.
TUIA STATEMENT
Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his tireless dedication to educating students in real -world principles of economics and business, the William C. Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging, practical learning experience. Managed by Fox School of Business graduate and undergraduate students with oversight from its Board of Directors, the WCD Owl Funds goals are threefold: Provide students with hands-on investment management experience Enable students to work in a team-based setting in consultation with investment professionals. Connect student participants with nationally recognized money managers and financial institutions
Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs and partial scholarships for student participants.
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