What Is Troubling Coach? Will The Remedies Bring Turnaround?

Coach, Inc. (NYSE:COH) looks quite disciplined in its approach when it comes to tackling prevailing headwinds in the retail landscape — sluggish store traffic, stiff competition from online retailers and aggressive pricing strategy. The company has undertaken transformational initiatives revolving around products, stores and marketing to pull itself back on growth trajectory and emerge as a multi-brand company. Further, a VGM Score of A and long-term earnings per share growth rate of 11.1%, clearly indicate the stock’s inherent potential.

Despite these tailwinds, the stock is struggling to find a safe zone. In fact, the stock has declined 14.1% in the past three months compared with the industry’s growth of 1.1%. Let’s find out what’s bothering this stock.

What’s Giving the Stock a Hard Time?

We noticed that shares of Coach came under pressure after the company reported fourth-quarter fiscal 2017 results on Aug 15. Analysts pointed that disappointing top-line performance and not so encouraging outlook in spite of integration of Kate Spade & Company hurt investor sentiment.

After declining 4% during the third quarter of fiscal 2017, net sales tumbled 1.8% in the final quarter. Moreover, we also noted that the total sales of $1,133.8 million fell short of the Zacks Consensus Estimate of $1,146 million, thus marking the fourth successive quarter of revenue miss. Sales growth were hurt by 60 basis points due to management’s efforts to elevate the Coach brand’s positioning in the North American wholesale channel by lowering promotional events and door closures.

Are the Remedies Sufficient?

As one of the leading American marketers of fine accessories and gifts, Coach boasts a proven strategy of investing in stores to enhance sales output through product innovation, compelling pricing strategy, new merchandise assortments and cost-effective global sourcing model. We believe that these strategies will help drive comparable-store sales and operating margins in the long term. The company’s growth drivers include expansion of global distribution model and venturing into under-penetrated markets.

Coach is undergoing a brand transformation and introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman has been accretive to performance and is being viewed as a significant step in its efforts toward becoming a multi-brand company. The recent agreement to acquire to Kate Spade & Company for $2.4 billion is another step taken in that direction. Additionally, it is aggressively expanding e-Commerce platform.

Strategic endeavors along with transformational initiatives are expected to facilitate the company to attain operating income growth of 22-25% backed by mid-single digit organic growth, Kate Spade buyout and estimated synergies of $30-$35 million.

Taking the pros and cons into consideration, the stock currently carries a Zacks Rank #3 (Hold).

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