Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel !

Foot"ear

Coach Company Analysis

Recommendation: Sell Coach #he current recessionary en$ironment has ha a stron% ne%ati$e impact on in i$i ual income le$els& consumer spen in% an consumer cre it a$aila'ility( As a pro ucer o) hi%h price lu*ury %oo s Coach stan s to su))er )rom the state o) the economy as conspicuous consumption is )ro"ne upon an consumer )ru%ality is in )ashion( #hese are )actors that si%ni)icantly impact Coach+s )inancial outloo, as the company has e*perience eclines in 'oth same store sales as "ell as earnin%s )rom )iscal 200- to )iscal 200.( Coach+s %ross mar%ins are also shrin,in% as the company has ha to increasin%ly rely upon its )actory outlet stores to sell its pro ucts1( #his also presents the pro'lem o) 'ran ilution( From a $aluation perspecti$e Coach+s //0 ratio& currently at 1-(23& is "ell a'o$e the apparel in ustry a$era%e o) 3(21& "hich su%%ests that )rom a relati$e $aluation perspecti$e the company may 'e o$erprice 2( Furthermore& the DCF analysis in icates an intrinsic $alue o) appro*imately 235(00 "hile the current share price is 23-(27 33/11/10 close4( 5ase on this 6uantitati$e ata the stoc, is currently o$erprice an has $ery little up"ar potential "ithin our in$estment hori7on( #he stoc,+s price has increase o$er 2008 in the past year an has 'een )luctuatin% 'et"een 239(00 an 237(00 since :cto'er 3please see Appen i* 14( #he alpha )rom this stoc, "as )ully e*tracte in 200. an the Coach hol in%s ha$e run their course( #he intent o) this report is to illustrate that 'ase on a com'ination o) 6ualitati$e an 6uantitati$e )actors this stoc, is currently o$er$alue an it is pre)era'le to sell Coach an see, another stoc, to replace its $alue( Company Overview Coach Inc( speciali7es in the pro uction o) premium li)estyle accessories an is one o) the most reco%ni7a'le lu*ury 'ran s in 'oth the ;nite States an <apan( #he company pro$i es inno$ati$e an )ashiona'le pro ucts at relati$ely attracti$e prices( Coach+s pro uct line consists o) han 'a%s 31984& accessories 32-84 an other 3-84 pro ucts inclu in% )oot"ear& =e"elry& 'rie) cases& etc 3please see Appen i* 24( >a=or elements o) i))erentiation inclu e: its istincti$e 'ran name& mar,et lea ership position& loyal customer 'ase& multi?channel international istri'ution an its consumer?centric esi%n operations3( #he Coach 'ran name is associate "ith 6uality an $alue ue to the company+s e*pertise in esi%n an emphasis on pro$i in% attracti$e prices to customers( Coach is the mar,et share lea er )or han 'a%s an accessories in the ;(S( an <apanese mar,ets 3please see Appen i* 34 an is tar%etin% emer%in% mar,ets such as China )or )urther
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Coach Inc& 2009 Annual Report: 22( Reuters/C:@( http://"""(reuters(com/)inance/stoc,s/o$er$ie"Asym'olBC:@(C 3 Coach Inc& 2009 Annual Report: 1(

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear %ro"th opportunities( #he company has culti$ate an emotional attachment 'et"een its customers an its 'ran throu%h continually pro ucin% superior $alue an 'ein% a'reast o) mar,et tren s( Coach pro ucts are sol throu%h 'oth its o"n retail outlets as "ell as other esta'lishe retailers "orl "i e an throu%h its online catalo%( It is a consumer centric 'usiness as the company con ucts ri%orous consumer research in %au%in% chan%in% tren s an consumer interests( #he company+s esi%n an merchan isin% teams are "ell respecte )or colla'oratin% to )orecast )ashion tren s an pro uce 6uality pro ucts that are appropriate )or each season9( Supply Chain /ro uction 'e%ins "ith Coach+s Ce" Dor,?'ase esi%n an merchan isin% teams( #hese t"o teams "or, in tan em to pro uce items that perpetuate the Coach 'ran an its ima%e o) 6uality( #he esi%n team conceptuali7es Coach pro ucts an has access to the company+s archi$es o) 70 years "orth o) esi%n concepts( #hese archi$es are a $alua'le resource )or ne" esi%n concepts( #he esi%ners are supporte 'y a merchan isin% team that e*cels in consumer research( >erchan isers are responsi'le )or analy7in% pro ucts an a in% as "ell as eletin% lines in or er to achie$e pro)ita'le sales across all channels( #he pro uct cate%ory teams& "hich consist o) 'oth esi%ners an merchan isers& help Coach e*ecute esi%n concepts that are consistent "ith the company+s 'ran ima%e an strate%ic irection( Ehile Coach controls the esi%n o) its pro ucts the manu)acturin% is one 'y in epen ent contractors( Coach ensures 6uality ra" materials %o into its pro ucts 'y maintainin% sourcin% an pro uct e$elopment o))ices in @on% Fon%& China& South Forea an In ia that "or, closely "ith the in epen ent manu)acturers( #he ri%orous selection o) ra" materials has 'een ,ey to maintainin% Coach+s 'ran ima%e o) superior 6uality( Coach )actories are in lo" cost mar,ets such as China& #hailan & Gietnam& #ur,ey& 0cua or an others( #he company+s commitment to maintainin% material 6uality com'ine "ith the lo" cost manu)acturin% process has 'een an inte%ral aspect o) the company+s )inancial success( Coach operates an -50&000 s6uare )oot istri'ution center in <ac,son$ille& Flori a( #his automatic )acility uses a 'ar co e scannin% "arehouse mana%ement system( Coach+s employees use scanners to rea pro uct 'ar co es "hich allo"s )or more accurate pac, or ers& trac, shipments& in$entory mana%ement an o$erall 'etter customer ser$ice( /ro ucts are then eli$ere )rom this "arehouse to Coach retailers an "holesale customers5(

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Ei,in$est/C:@( http://"""("i,in$est(com/"i,i/Coh Coach Inc& 2009 Annual Report: 7?-(

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear Industry Overview Coach is consi ere to 'e in the apparel an )oot"ear in ustry( As a pro ucer o) lu*ury accessories& Coach occupies a smaller niche portion o) this mar,et ena'lin% %reater )le*i'ility in pro uct pricin%( Coach has esta'lishe a reputation )or 6uality an $alue as "ell as a 'ran name that ena'les it to e*tract premiums "ithin its in ustry( #hou%h the S ! / 500 peer composite lists companies such as #i))any+s Inc& Fenneth Cole /ro uctions an Eilliam Sonoma& Coach+s most si%ni)icant competition oes not ta,e place "ithin the ;nite States1( #he han 'a% mar,et is primarily ominate 'y 0uropean companies such as Hucci& Fen i& /ra a& Iouis Gitton an others( #hese companies are at the hi%hest price point in the accessories mar,et "ith han 'a% prices in e*cess o) 21&000( #he primary emo%raphic )or the elite han 'a% mar,et is the a))luent an e*treme 'ran oriente consumer( Coach+s han 'a%s are escri'e as Ja))or a'le lu*uryK items as the company competes at a lo"er price point o) 2300?2-007( Coach has a multi?tiere pricin% strate%y as it utili7es its o"n retail as "ell as epartment store sales to capture hi%her price points "hile sellin% its ol er merchan ise at )actory outlet stores to capture the lo"er en o) its mar,et( #he emo%raphic )or Coach+s pro ucts is primarily the mi le to upper mi le class( Industry Trends S ! / Cet A $anta%e pre icte that apparel in ustry sales "oul e*perience eclines in the ran%e o) 38?158 in 200.( @o"e$er& apparel sales "ere actually sli%htly impro$e in 200.( Accor in% to the Census 5ureau sales in the apparel in ustry& o"n 7(78 )rom +07 to +0-& "ere up 2(28 )rom +0- to +0. 3please see Appen i* 94( @o"e$er& the ma=or tren occurrin% in the apparel in ustry is re)erre to as the JCe" CormalK "hich entails lo"er consumer spen in% an lon% term o"n"ar re$isions in eman )or apparel pro ucts in response to the current recessionary en$ironment 3please see Appen i* 54( #his Ce" Cormal concept in$ol$es a more )iscally responsi'le consumer "eary o) cre it car e't an o$erspen in%-( A sur$ey con ucte 'y Cielson Hlo'al :nline in icate that in this time o) risin% li$in% costs the )irst items to 'e e*clu e )rom consumers+ 'u %ets "ere ne" clothin% purchases 3please see Appen i* 14( Cone o) this 'o es particularly "ell )or Coach as a pro ucer o) lu*ury accessory pro ucts( Coach+s pro ucts are hi%hly su'stituta'le 'y lo"er price %eneric han 'a%s( @o"e$er& the )actory outlet stores o alle$iate some o) this concern as they pro$i e Coach access to a more price sensiti$e consumer mar,et( In the current economic climate Coach+s sales ha$e come increasin%ly )rom the )actory stores& "hich mar, pro ucts o"n 10?508.( Ehile this is pro$i in% the company "ith %reater short term sales it is resultin% in lo"er %ross mar%ins an coul cause lon% term harm to the company+s 'ran ima%e( Coach must try to a$oi 'ecomin% Ltoo accessi'le+ as part o)
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0 %aronline(com/C:@/peer composite( http://yahoo('ran (e %ar?online(com/0FMN ll/0DHARpro( llA FetchFilin%@tmlSection1ASectionIDB1111.53?-7129?.1.20!SessionIDBroI1E6O$1-C%h"7 7 Coach homepa%e( http://"""(coach(com/online/han 'a%s/@ome?10551?10051P http://"""(neta $anta%e(stan ar an poors(com/apparel . Coach Inc& 2009 Annual Report: 9(

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear the allure o) its pro ucts is their lu*urious ima%e( I) Coach pro ucts 'ecome too mainstream there is the potential that this lu*urious ima%e may 'e lost an the company "ill stru%%le to e*tract %reater premiums as the economy reco$ers( Multi-Tiered Pricing Strategy Coach+s pro ucts are consi ere lu*ury items 'ut are more accessi'le than most lu*ury han 'a%s ue to the $ariety o) price points that the company o))ers( #he most up to ate seasonal merchan ise is sol thru its retail stores( #hese are %enerally in upscale o"nto"n areas "ith a tar%et mar,et o) the upper mi le class to the a))luent( #he retail prices are %enerally 'et"een 2300 an 2-00( #here are no iscounts in Coach+s hi%h en retail stores( Coach also istri'utes its pro ucts to hi%h en epartment stores such as >acy+s an Cor strom( #hese epartment stores are prohi'ite )rom iscountin% Coach+s pro ucts( Factory outlet store sales ha$e 'ecome increasin%ly si%ni)icant to Coach+s )inancial success in the 9 years( #he company sells its unsol merchan ise throu%h these outlet stores( /ro ucts sol throu%h the outlet stores are %enerally a year ol or ol er an are mar,e o"n 108?508( Coach also uses the internet as "ell as a company catalo%ue to sell its merchan ise( Currently appro*imately -98 o) Coach+s sales are irect?to?consumer& "hich inclu es the retail stores& )actory outlets& the "e'site an the catalo%ue( Appro*imately 118 o) Coach sales ta,e place thru in irect channels& "hich consists o) the hi%h en epartment stores10( As mentione 'e)ore& Coach+s increasin% reliance on )actory stores )or sales are cause )or concern as the 'ran +s lu*ury ima%e may 'ecome ilute as the economy reco$ers( Accor in% to Coach+s earnin%s calls the company+s )actory store sales ha$e 'een so success)ul that it is actually 'e%innin% to pro uce Jma e?)or?)actoryK pro ucts11( Eomen "ear lu*ury han 'a%s as i))erentiatin% status sym'ols( Ehen a lu*ury item 'ecomes too accessi'le to all consumers there is no allure )or the career "omen "ith money to purchase such an item as they o not "ant to "ear "hat teena%ers "ear( #his results in o"n"ar re$isions in consumers+ opinions an price e*pectations o) the 'ran an as a result hurts %ross mar%ins( #his is pro'lematic as the company 'ecomes a lo" mar%in pro ucer it "ill 'e competin% a%ainst a %reater amount o) cheaper %eneric han 'a%s( 0))orts shoul 'e ta,en to protect Coach+s 'ran i entity an ensure that the company+s price points an 'ran ima%e remain a'o$e those o) %enerics a$oi in% the temptation to lo"er prices in i))icult economic times(

Geographic !pansion
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Coach Inc& 2009 Annual Report: 19( Coach& Inc( F2O10 3Otr 0n 12/21/0.4 0arnin%s Call #ranscript( http://see,in%alpha(com/article/1-3990?coach?inc?)2610?6tr?en ?12?21?0.?earnin%s?call?transcriptA sourceB'net

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Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear Coach is num'er one in the ;(S( an num'er t"o in <apan in terms o) lu*ury han 'a% mar,et share( #he ;(S( represents 728 o) Coach sales "hile <apan represents 258( Coach has a%%ressi$e e*pansion plans )or these t"o mar,ets( Coach currently operates 330 retail stores in Corth America an 'elie$es that the Corth American mar,et can support appro*imately 500 retail stores( Similarly Coach currently operates 155 retail stores in <apan an 'elie$es that the <apanese mar,et can support 1-0 retail stores( Coach inten s to continue on "ith its e*pansionary a%en a espite the economy as the company is plannin% to 'uil 20 ne" Corth American stores an 10 ne" <apanese stores in 201012( @o"e$er& Coach has little to no mar,et share in 0urope as se$eral o) the a)orementione elite han 'a% 'ran s ominate the 0uropean lan scape( Due to the lu*urious nature o) the pro uct there is $ery little potential )or Coach to e*pan in e$elopin% nations as the company has almost no presence in South America& A)rica or Southeast Asia( @o"e$er& Coach is plannin% )or a%%ressi$e e*pansion into the Chinese mar,et( #he Chinese mar,et represents 18 o) Coach sales "ith the company currently o"nin% 2- stores there an plannin% to open 15 ne" locations in 2010( @o"e$er& the stru%%le )or Chinese mar,et share "ill 'e e*tremely competiti$e as the 0uropean companies "ill also 'e enterin% this mar,et( Coach is 'an,in% on the assumption that the massi$e increase in Chinese "ealth "ill 'e %reat enou%h to support numerous lu*ury han 'a% pro ucers enterin% the Chinese mar,et( Coach+s plans )or %eo%raphic e*pansion urin% this recessionary en$ironment are cause )or a 'it o) concern( #he company+s 1(18 increase in sales )rom +0-?+0. "ere ri$en purely 'y e*pansion "hile same?store sales ecline 1(-8& %ross mar%ins roppe 98& net mar%ins roppe 58 an earnin%s roppe 20813( A%%ressi$e e*pansion as the compara'le earnin%s o) the company ecline is a $ery ris,y strate%y( Coach mana%ement appears to ha$e a rosy outloo, re%ar in% its positionin% in the economy 'eyon this current recession( Despite its e*pansionary plans there are not many mar,ets )or Coach to e*pan in outsi e o) the Corth America& <apan an China( #he lu*urious an niche nature o) its pro uct on+t necessarily attract consumers in lo"er income economies( #his %eo%raphic concentration may limit Coach+s %ro"th opportunities in the lon% term an potentially prohi'it up"ar mo$ements in its stoc,( "inancial #nalysis Coach+s income statement )or )iscal 200.& "hich inclu es <une 30& 200- thru <une 30 200.& re)lects the o$erall tren s ta,in% place in the consumer iscretionary sector( #he sli%ht sales increase o) 1(18 is lar%ely ue to store e*pansion as 33 Corth American stores "ere a e 3an 118 increase4& . ne" )actory outlet stores 3a .8 increase4& 1 ne" <apanese stores 3a 98 increase4 an 9 ne" China stores 3a 178 increase4( #his increase in sales coinci e "ith a se$ere 208 ecrease in net income19( #his con)lictin% increase in sales "ith such a lar%e rop in earnin%s re)lects a si%ni)icant ecrease in net mar%ins(
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Coach Inc& 2009 Annual Report: 1-( Coach Inc& 2009 Annual Report: 20( 19 Coach Inc& 2009 Annual Report: 3(

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear In the notes to Coach+s )inancial statements the company attri'utes this to an increasin% reliance on its )actory outlet stores )or sales( #he company also reco%ni7es the )actory stores increasin% impact on its sales in its recent earnin%s calls( @o"e$er& there "as no 'rea, o"n o) sales 'y )actory stores $ersus other channels in its 10, or any"here else so I "as una'le to etermine the e*act percenta%e o) this increasin% reliance on )actory stores( /rior to 200. Coach+s %ross mar%ins "ere %enerally aroun 718?778 "hile its net mar%ins "ere usually 'et"een 238 an 298( @o"e$er& in 200. the %ross mar%ins roppe to 718 "hile the net mar%ins slippe to 1.8 3please see Appen i* 74( #he 10O )or Coach+s 200. holi ay season& "hich is actually O2 2010 )or Coach& re)lecte sli%htly 'etter results than the pre$ious year that "as re)lecte in the company+s 200. income statement( 5oth sales 31184 an net income 31184 increase )rom the holi ay season o) +0. $ersus +0- 3please Appen i* -4( #he impro$e holi ay sales resulte in trailin% t"el$e month sales that "ere 3(58 'etter than the 200. income statement( @o"e$er& neither the %ross nor net mar%ins ha$e impro$e an are 'oth still at 718 an 1.8( Coach+s 'alance sheet is $ery stron%( #he company has 21(1 'illion in cash& "hich represents more than a thir o) its total assets an almost ou'les the company+s current lia'ility total( #his stron% "or,in% capital position is )urther ai e 'y the )act that the company+s current assets are three?)ol %reater than its current lia'ilities( #his is imperati$e as maintainin% a stron% "or,in% capital is ,ey in the apparel retail in ustry( 0$en more impressi$e is the company+s capital structure( Coach has only 225 million in e't& ma,in% it .-8 reliant on e6uity $ersus 28 on e't )or its )inancin%15( #his stron% cash position "ith its little to no e't %i$es Coach a lot )inancial )le*i'ility in these i))icult economic times( Coach has eci e to utili7e this )inancial )le*i'ility 'y e*pan in% into ne" mar,ets an )orti)yin% ol ones( #his is illustrate 'y the increase in capital e*pen itures in icate in the DCF analysis as the company+s ##> capital e*pen itures ha$e increase to o$er 2500 million& "hich o$er t"ice as much as the prior year( Ehile the company is )inancially healthy enou%h to un er%o such e*pansion "hether this is the pru ent use o) )un s in this recessionary en$ironment is yet to 'e seen( I am s,eptical as to "hether the eman )or this pro uct in this i))icult economy "ill support such e*pansion( Coach also has a $ery stron% cash )lo" statement( Cash in)lo"s )rom operations "ere 2-00&000 "hich in icates that the company is oin% a soli =o' o) %eneratin% cash )rom its operations( #he company+s primary out)lo"s are capital e*pen itures an stoc, repurchases 32950&000411( #hese out)lo"s in icate that the company is $ery 'ullish on its )uture prospects an is "illin% to spen lar%e amounts on 'oth e*pan in% alon% "ith pro$i in% sharehol ers+ returns on their in$estments( #his stoc, pay'ac, "ill increase returns on e6uity as the e6uity ecreases( In conclusion& Coach+s income statement re)lects lo"er mar%ins an ecreasin% same store sales "hile the increase in o$erall sales is supporte 'y e*pansion( Coach+s emo%raphic has ri)te to"ar a more )ru%al consumer "illin% to purchase last years+ merchan ise at a lo"er price point( #his is re)lecte in lo"er %ross an net mar%ins(
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Coach Inc& 2009 Annual Report: 3-( Coach Inc& 2009 Annual Report: 91?92(

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear >ean"hile& the 'alance sheet is tren in% positi$e as the company has little to no e't an is a'le to )un its e*pansion "ith its %iant cash account( #he company is also usin% its cash to 'uy 'ac, e6uity& returnin% $alue to its in$estors an lo"erin% its e6uity 'ase( :utsi e o) the current recessionary en$ironment impact on Coach+s sales it appears that company is )inancially healthy( S$OT #nalysis Stren%ths Core Competence in esi%n an merchan isin%: Coach has o$er 70 years "orth o) esi%n archi$es to assist it in pro ucin% pro ucts )or each season( #his lon% history in the han 'a%/accessory mar,et %i$es it a competiti$e a $anta%e as it has a $ast amount o) pre$ious esi%ns to 'uil o)) o) "hen pro ucin% pro ucts )or each season( #his lon% company history has also %i$en the merchan isin% team stron% e*perience in e$elopin% consumer research capa'ilities an %i$en it a ,een sense o) "hat its tar%et emo%raphic "ants( >ulti?tiere pricin% strate%y: Coach+s pro uct is classi)ie as a Jlu*uryK item 'ut is accessi'le to a lar%er mar,et ue to the $ariety o) price points that the company o))ers( #hese inclu e hi%h en retail an epartment stores as "ell as the cheaper )actory outlets( Analysts ha$e note that this tiere pricin% strate%y is not common in the lu*ury %oo s in ustry& "hich on a$era%e has hi%her entry?le$el price points than that o) Coach( #his pricin% structure allo"s the company to attract a))luent consumers "hile also pro$i in% lo"er?income consumers access to a 'ran they "oul not 'e a'le to a))or other"ise( #hrou%hout the recession this has ,ept o$erall sales num'ers sta'le thou%h it has cause mar%ins to ip( 0sta'lishe 'ran name: 5ran names are "hat allo" companies in the apparel in ustry to e?commo iti7e clothin%/accessory pro ucts an e*tract premiums )rom the mar,et( #hrou%hout its history Coach has e$elope a reputation )or pro$i in% its customers 'oth 6uality an $alue( #his has helpe the company esta'lish a )ollo"in% o) consumers that 'uy Coach pro ucts e*clusi$ely( Iots o) cash an almost no e't: Coach has a stron% 'alance sheet "hich allo"s it to )inance its operations internally( #his is a hu%e 'oon to a lu*ury 'ran 'usiness in a recessionary economy an pro$i es it "ith a stron% )inancial competiti$e a $anta%e as lu*ury competitors+ may not ha$e access to such )inancin%( #his cash a $anta%e allo"s Coach to e*pan "ithout the nee to rely on currently e*pensi$e 3or una$aila'le4 le$era%e(

Eea,nesses Heo%raphic concentration: Coach currently relies on =ust the ;(S( an <apan )or .78 o) its sales an it may 'e i))icult to e*pan this limite %eo%raphic reach(

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear Coach is $ery limite in its e*pansion possi'ilities( 0urope is entirely ominate 'y the elite 0uropean lu*ury 'ran s "hile there is not yet a mar,et )or lu*ury items in many emer%in% mar,ets( #his lea$es Coach "ith e*pansion potential in its e*istin% mar,ets: the ;(S( an <apan( @o"e$er& these mar,ets are 'e%innin% to saturate an it may 'e ris,y to )urther e*pan in these mar,ets in this economic en$ironment( China is the ma=or ne" mar,et that Coach inten s to e*pan in an this "ill 'e an e*tremely competiti$e e*pansion as the elite 0uropean 'ran s "ill also enter the Chinese mar,et( Declinin% mar%ins: Coach is e*periencin% eclinin% mar%ins on its pro ucts( #his is primarily ue to the economy+s impact on lu*ury 'ran purchases "hich has cause sales at its )actory stores to increase as more consumers see, 'ar%ains( Coach has 'een relyin% on sales at its lo"er price points an thou%h net sales ha$e remaine stea y the mar%ins ha$e shrun, )rom 31(18 in )iscal year 200- to 30(18 in )iscal year 200.( #his is a trou'lin% tren )or a lu*ury company that relies on its 'ran to pro uce superior mar%ins on its sales(

:pportunities 0*pansion in the ;(S(& <apan an China: As pre$iously mentione Coach+s sales ta,e place pre ominantly in the ;(S( an <apan( #he company+s C0: )eels that& "hile the company has 330 stores in Corth America& that this mar,et can support up to 500 stores( An "hile there are currently 155 Coach locations in <apan mana%ement 'elie$es that the <apanese mar,et can support a total o) 1-0 stores( Eith the rise o) China+s mi le an a))luent classes the Chinese mar,et has 'ecome increasin%ly important )or lu*ury 'ran s such as Coach( :$er the ne*t 5 years Coach plans to open a total o) 50 retail locations in China an increase its mar,et share )rom 3 to 108(

#hreats Iu*ury 'ran suscepti'le to recessionary en$ironment: Retailers ha$e ha to "eather a i))icult economic en$ironment since 200-( Consumers are unsure o) their )inancial security as companies ha$e resorte to layin% o)) "or,ers in an e))ort to cut costs( In an uncertain economic en$ironment consumers see, to cut costs an sa$e as much money as they can& an clothin% is usually the )irst to %o( Iu*ury clothin% an accessory items& in particular& ha$e 'een an "ill 'e a))ecte the most in this Ce" Cormal economic en$ironment( 5ran ilution: As a lu*ury retailer& Coach hea$ily relies on an ima%e o) e*clusi$ity to )uel interest an sales o) its pro ucts( A lu*ury company can lose its allure i) the 'ran 'ecomes too popular or too accessi'le( Coach ris,+s losin% this lu*ury status 'y sellin% throu%h its )actory outlet stores( #his cheaper sales channel ma,es Coach+s pro uct a$aila'le to a i))erent tar%et emo%raphic than Coach+s tra itional lu*ury consumers( #his accessi'ility to a lo"er en mar,et may put o)) Coach+s hi%h en consumers "ho $alue the e*clusi$ity o) the 'ran (

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear In the lon% run this 'ran an its 'ran ima%e( Per%ormance #nalysis 5elo" are some per)ormance in icators that illustrate Coach+s superior )inancial per)ormance relati$e to a couple stron%er competitors as "ell as to its in ustry an sector a$era%es17: Coach /olo Ralph Iauren #i))any ! Co In ustry Sector R:0 91(308 11(3.8 11(5.8 19(938 -(-38 R:A 30(0-8 .(..8 10(198 -(328 3(298 Cet /ro)it >ar%in 22(9-8 -(128 11(058 5(108 3(328 ilution may ne%ati$ely impact 'oth Coach+s mar%ins

/olo Ralph Iauren an #i))any ! Co( are some o) Coach+s top omestic competitors( #hese three are the only companies to ha$e positi$e earnin%s an hence report //0 ratios "ithin Coach+s S ! / peer composite o) si* companies "hich also inclu e Fenneth Cole /ro uctions& Ann #aylor Stores& Eilliam Sonoma an #al'ots( Coach is clearly a top per)ormer "ithin its in ustry as the company has $astly outper)orme the in ustry a$era%es in R:0& R:A as "ell Cet /ro)it( It has outper)orme the sector a$era%es e$en more si%ni)icantly an its stoc, has 'een a top per)ormer in the apparel in ustry o$er the last 5?1 years 3please see Appen i* 74( Furthermore the company has e*cee e some o) its 'etter per)ormin% peers in these )inancial metrics( #he e6uity 'uy 'ac,s are clearly ai in% in the return on e6uity metric an thou%h the mar%ins are ecreasin% they are still a'o$e the $ast ma=ority o) companies "ithin its in ustry( @o"e$er& it "oul 'e more in)ormati$e to loo, at some o) the company+s more compara'le 0uropean competitors( @o"e$er& this ata are currently una$aila'le( Relative &aluation #nalysis 5elo" are some relati$e $aluation )i%ures relatin% Coach& some o) its omestic competitors as "ell the in ustry an sector a$era%es1-( Coach /olo Ralph Iauren #i))any ! Co( In ustry Sector 0/S 2(00 9(09 1(27 C/A C/A //0 1-(10 1.(-9 39(39 3(57 35(10 //Sales 3(9. 1(12 2(12 0(29 0(20

17 1-

"""(reuters(com """(reuters(com

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear In loo,in% at the a'o$e ata it appears that Coach+s //0 ratio is "ell 'elo" the consumer iscretionary sector a$era%e& "hich is most li,ely ue to a earth in earnin%s in this sector )rom the prior year( @o"e$er& Coach+s //0 ratio is "ell a'o$e in ustry a$era%e o) Q3(57( #his may in icate that the company is o$er$alue ( Coach+s //0 ratio is in line "ith /olo Ralph Iauren+s an "ell un er #i))any+s( Ehile Coach+s hi%h //0 ratio may re)lect an o$er$alue stoc, the Discounte Cash Flo" analysis "ill 'e the primary in icator in that re%ar ( 'C" #nalysis /ro$i e are the inputs )or my EACC calculation: Ris, Free 10 Dear 5on Ris, /remium 5eta Cost o) 06uity 06uity Eei%ht De't Rate A)ter #a* Cost o) De't De't Eei%ht EACC 9(908 5(178 1(30 11(108 .-(008 9(1-8 3(008 2(008 10(.18

Coach+s 'eta is liste on multiple "e'sites as 'ein% in the ran%e o) 1(73( Initially this num'er "as use in the EACC calculation "ith the cost o) capital 'ein% o$er 138( @o"e$er& upon )urther consi eration this 'eta "as eeme too hi%h an that a num'er closer to the in ustry a$era%e "as more appropriate( @o"e$er& accor in% to Reuters the apparel in ustry a$era%e 'eta is 0(-9& "hich is )ar too lo" )or a lu*ury 'ran pro ucin% a hi%hly iscretionary pro uct( ;sin% the in ustry a$era%e "oul ha$e put Coach+s 'eta 'elo" that o) $alue retailer #ar%et+s 31(014 "hich oes not accurately re)lect the nature o) Coach+s ris, in this recessionary economy( #he mean o) the in ustry a$era%e 30(-94 an the in i$i ual 'eta 31(734 "as ta,en an use in the DCF( #his mean num'er "as appro*imately 1(30( #his num'er seems appropriate )or a company pro ucin% hi%h en pro ucts( As mo i)ie the results are in icate in the ta'le 'elo": Current /rice 33/12 close4 Cost o) Capital #erminal Hro"th Rate De't DCF Shares :utstan in% Galue per Share 23-(27 FCFF 10(.18 3(58 225(071 > 211(12- 5 2317(- > 235(05

FCF0 11(108 3(58 211(2-3 5 2317(- > 235(59

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Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear Some o) the important assumptions that I ma e "ere re$enue %ro"th o) 38 in the )irst couple o) years that %ra ually ma e its "ay to 58 at year 5 o) my $aluation( #his is primarily 'ecause I see the company+s %ro"th at least sli%htly e*cee in% in)lation o$er the ne*t couple years an then %ra ually increasin% as the economy %ets stron%er( #he company+s e*pansionary %oals almost ensure that there "ill 'e at least 38?58 re$enue %ro"th o$er the ne*t 5 years( I also ha$e SH!A an C:HS remainin% sta'le as a percenta%e o) re$enue o$er the )irst couple o) years an then %ra ually ecreasin% as a percenta%e o) sales as the economy impro$es( 0$en "ith these some"hat optimistic )orecasts the company+s stoc, appears to 'e a 'it o$er$alue ( #he intrinsic $alue un er the Free Cash Flo" to the Firm mo el "as 235(05 "hile the $alue "as 235(51 un er the Free Cash Flo" to 06uity mo el( #his appro*imate $aluation o) 235(00 is a 'it 'elo" the current share price o) 23-(27( #his appears to 'e an appropriate 'eta num'er as Coach+s stoc, ha 'een ho$erin% 'et"een 239(00 an 237(00 )or se$eral months( @o"e$er& i) Coach+s in i$i ual 'eta "ere to 'e use the intrinsic $alue o) Coach stoc, "oul 'e si%ni)icantly lo"er( ;sin% Coach+s 'eta o) 1(73& the intrinsic $alue o) Coach stoc, "as calculate at appro*imately 22-(00 usin% 'oth FCF0 an FCFF( #his is o$er 210(00 'elo" the current share price( Re%ar less o) the 'eta num'er use this stoc, appears to 'e o$er$alue ( #his 6uantitati$e in ication o) $alue lea s me to conclu e that Coach+s stoc, price e*cee s its intrinsic $alue an that it is currently time to sell this stoc, an see, alpha else"here( Conclusion #he o$erri in% )actors in the ecision to sell Coach stoc, are its hi%h price relati$e to its intrinsic $alue an the hi%hly un)a$ora'le current mar,et con itions )or lu*ury 'ran s( In loo,in% at the SE:# analysis the "ea,nesses an threats out"ei%h the stren%ths an opportunities "ith re%ar to the stoc, sell ecision( #he SE:# illustrate the soli )inancial position as "ell as the hi%hly re%ar e operatin% history o) this company( Coach has soli )inancials as o) the 9th 6uarter o) 200. as its total e't/e6uity ratio is 0(013 an it has 21(1 'illion in cash( #he company is one o) )e" lu*ury 'ran s "ith increasin% sales throu%hout this recession( #he multi?tiere pricin% structure appears to 'e ,eepin% the company on an up"ar tren "ith re%ar to net sales num'ers( @o"e$er& the Ce" Cormal en$ironment presents some si%ni)icant challen%es )or Coach( #he company is e*pan in% in a time o) economic uncertainty an same store sales& espite an increase in the 9th 6uarter o) 200.& ha$e other"ise ecline since the 3r 6uarter o) 200-( 0$en more pro'lematic are the company+s eclinin% mar%ins( #he increasin% reliance on )actory store sales is a result o) )ru%ality per$a in% the economy an care)ul consumers purchasin% )e"er lu*ury items( I) increasin% sales throu%h )actory stores 'ecomes a lon% term strate%y rather than a temporary necessity then Coach+s 'ran ima%e "ill 'e tarnishe an its a'ility to %enerate superior mar%ins& as it has one in the past& "ill 'e iminishe ( #he other ma=or )actor in the ecision to sell Coach is its stoc, price 'ein% %reater than its intrinsic $alue( Accor in% to the DCF analysis the $alue is at appro*imately 235(00 relati$e to a mar,et price o) 23-(27 as o) Fri ay >arch 12th( #his is a si%ni)icant iscrepancy an in icates that Coach shares are o$er$alue ( Coach stoc, thri$e last year an e*cee e its tar%et $alue in :cto'er o) 200. a)ter a 2008 increase(

11

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear It has "a$ere since then an it appears that there is not a lot o) potential up"ar mo$ement( #he port)olio "ill 'ene)it )rom sellin% Coach stoc, an purchasin% shares in a company 'etter positione to thri$e in this recessionary economy an that is currently sellin% 'elo" its intrinsic $alue(

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Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear

Appendices
#ppendi! (: Coach stoc) over last * years

#ppendi! *

Coach 200. 10,& p( 2

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Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear #ppendi! +

Coach 200. 10,& p( 15

#ppendi! ,: -ear over year consumer spending on apparel in last three holiday seasons 9O01/9O07 2(28 9O07/9O0?7(78 9O0-/9O0. 1(-8

;(S( Census 5ureau: Consumer Spen in%

#ppendi! .

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Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear

#ppendi! /

15

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear #ppendi! 0: Past , years o% Sales and 1et Income illustrate declining margins 2in 3illions4

4 3 2 1 0 2.11 2.61

3.18 3.23

0.78 0.62 0.49 0.64 2006 2007 2008 2009

Coach 200. 10,& p( 90

#ppendi! 5: Past , holiday seasons o% sales and net income illustrate declining margins 2in 3illions4

1.2 1 0.8 0.6 0.4 0.2 0 0.81

0.98 0.96

1.07

0.23 0.25 0.22 0.24

Q406 Q407 Q408 Q409

10O Data per S0C(%o$

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Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010 Sector: Consumer Discretionary In ustry: Apparel ! Foot"ear #ppendi! 6: Coach stoc)s per%ormance relative to peers and S 7 P .88

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