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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Coach (COH) |
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Selected Analyst Coverage (Target): HSBC Global — Overweight ($54) Oppenheimer — Buy ($50) Credit Suisse — Neutral ($49) |
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COH Closed at $50.00 on 3-12-07 |
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Released 3-13-07 |
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Coach (ticker: COH) designs and sells primarily upscale handbags and accessories, including leather goods for both men and women. The company sells its products through both company-owned stores and third-party retailers such as department stores and specialty retailers. · Coach is principally known for their iconic and high-margin handbags, which serve as the company stores’ center attraction. Coach has succeeded in diversifying across multiple segments of the handbag market, from the “trade up” consumer seeking a $100-200 item to the “ultra luxury” $500+ market. This product mix, combined with strong brand loyalty across various ages and income levels, has widened the potential customer base and greatly aided Coach in quadrupling sales since its 2001 spin-off. · In addition to its core handbag lines, Coach has been aggressively expanding its brand reach into other accessory areas, such as sunglasses, watches, and perfume. These products should nicely add to Coach’s entrenched position in the luxury accessory market. · The two primary markets for Coach products are currently the United States (75%) and Japan (15%). While the company is targeting the Chinese market and beginning to build brand recognition and loyalty there, China will likely not be a significant contributor to profitability for some time. The international growth story right now is in Japan, which Coach has aggressively expanded into and succeeded in growing sales despite a challenging economic environment in that country. Coach should be able to grow earnings in the 15-20% range for the next several years. · All the talk of Coach’s brand loyalty is not irrelevant; the repeat consumption and high-quality image the company’s products enjoy greatly buoy selling prices, and allow for gross margins of over 75%, and operating margins in excess of 35%. The markup consumers are willing to pay allow Coach to generate strong operating cash flow of $718 million (ttm). Additionally, Coach has made strides in leveraging its sales and marketing, as well as same-store sales, both of which have been contributors to the healthy and improving measures of margins and profitability. · One notable footnote to Coach’s otherwise sterling balance sheet is operating leases that create liabilities of $590 million in total minimum future lease payments. While including these expenses into a ROIC calculation significantly lowers the company’s return on capital, Coach still shows a large spread between ROIC and cost of capital - a spread that is widening, indicating the company is still showing strong growth and returns. · Following the market correction in May 2006 (said to have been driven by fears of an economic slowdown), COH shares bottomed at $26 in July and have doubled since then. This strong performance has been attributed to market confidence that Coach’s customer base will prove to be resilient spenders, a view we share. However, we disagree with the rich valuation COH has been given as a result of this price run-up. · Given Coach’s anticipated earnings growth, its balance sheet position, cash flows, and business risk, our fair value target for COH is $40.05, putting COH shares as being overvalued by approximately 19.9% based of Monday’s closing price of $50.00.
Disclosure: The analyst has no position in COH or its derivatives. |
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