Coach (COH) Misses Estimates and Shares Plunge Nearly 20%
Shares of Coach (COH: Charts, News), the largest handbag maker in the United States, plunged this week after the company posted fourth quarter earnings of 86 cents per share on revenue of $1.16 billion. Both were a considerable improvement from the 68 cents per share on revenue of $1.03 billion it posted in the prior year quarter.
However, both top and bottom lines missed the analyst consensus of 85 cents per share on revenue of $1.2 billion, as well as the company's own guidance. Daily Chart
Shares crashed nearly 20% after the announcement, marking the stock's worst one-day decline in eleven years. This prompted a flurry of downgrades. Jefferies Group analysts downgraded the stock from "Buy" to "Neutral," while Piper Jaffray analysts downgraded it from "Overweight" to "Neutral." Coach attributed its lukewarm earnings to increasing competition from "affordable luxury" rival Michael Kors (KORS
), which has trounced estimates two quarters in a row, since its market debut last December. Coach also blamed a slowdown in U.S. domestic spending and overall worldwide weakness. Same store sales in North America grew at an anemic 1.7%, missing its own forecast of 6.7% growth, and a steep drop from the 10% it posted a year earlier. Analysts had expected 5% growth. Much of the weakness was caused by Hong Kong-based Michael Kors, which claimed 9.5% of the U.S. handbag market last quarter. Coach currently controls 35%. If Kors can meet its own full-year guidance, then it stands to gain another 3 percentage points, which could flatten Coach's sales growth in North America. Although Kors is Coach's primary threat in the handbag market, smaller brands such as Kate Spade, Ralph Lauren (RL
), Tony Burch and Fifth & Pacific are continuously fragmenting the rest of the handbag market. Coach's factory outlet stores also posted weaker than expected growth. The company noted that reinstating discount coupons at its outlet stores helped offset some of the weakness, at the expense of slimmer margins. However, its fledgling operations in China posted 60% sales growth, which was boosted by robust sales of men's goods. Over the past twelve quarters, Coach's revenue has risen an average of 14%. Earnings increased over 14% for each quarter of the last fiscal year. The company has also beaten 85% of analyst estimates over the past five years. The New York-based company, headed by CEO Lew Frankfort, has been one of the most successful growth names in fashion, pioneering the idea of "affordable luxury" geared towards upper middle-class consumers. Frankfort remained upbeat regarding the company's long-term growth prospects, stating that he was confident in Coach's "ability to drive our business at a double-digit pace." Frankfort also noted that Coach's non-handbag goods, such as outerwear, jewelry, watches and scarves, will help it diversify from handbags to strengthen its identity as a fashion icon. "We're driven to win," Frankfort stated. Coach was able to survive the last recession, when shares plunged to less than $12 per share, due to the discretionary shift from clothes and jewelry to handbags. Americans spent $8.5 billion on handbags in 2011, and industry-wide sales have been growing at 10% annually. Meanwhile, the women's apparel market has been growing at a meager 4%. Shares of Coach now trade at 10.8 times forward earnings, with a 5-year PEG ratio of 0.76. The stock pays a quarterly dividend of 30 cents per share, a 2.36% yield at current prices. Other News About COH Coach Droops as Kors Grabs Handbag Customers in Slowdown
Michael Kors threatens Coach's core competencies. Is Coach Losing its Brand Cachet?
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Published on Aug 2, 2012
By Leo Sun