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Coach Loses Luster With Coupons Cited in Quest for Share

Wall Street is hedging its bets on Coach Inc. (COH) as the largest U.S. luxury handbag maker’s once- stellar growth falters.

Coach’s fiscal first-quarter earnings report tomorrow may show that adjusted per-share profit growth slowed to about 3.4 percent from 16 percent a year earlier, according to the average of 28 analysts’ estimates compiled by Bloomberg. Sales growth may ease to 10 percent from 15 percent, analysts project.

The luxury retailer has resorted to more 25 percent coupons recently, according to at least three analysts, suggesting that the Legacy line it introduced just months ago isn’t providing the boost Coach had sought. That’s fueling investors’ concerns that Michael Kors Holdings Ltd. (KORS) and other rivals are encroaching on the market Coach long dominated.

“The sentiment is very negative,” Eric Cha, an analyst at Brown Advisory LLC in Baltimore, said in a telephone interview. “The biggest negative on them as far as sentiment is people are worried about them losing share.”

Brown Advisory held more than 4.6 million Coach shares as of June 30 among the about $30 billion in assets it manages.

At least three analysts have removed their buy or equivalent ratings since the New York-based company last reported earnings. Analysts on average have reduced their 12- month share price targets and have cut their sales and earnings estimates. Andrea Resnick, a spokeswoman for Coach, declined to comment.

Legacy Line

Chief Executive Officer Lew Frankfort is seeking alternate sources of growth, investing in the men’s category and continuing to add stores in China. The Legacy line, which rolled out in the U.S. in mid-July and globally the following month, is a big part of Frankfort’s efforts to goose sales.

Coach delved into its archives for the classic leathergoods and updated them using lighter-weight materials. Frankfort called Legacy Coach’s most significant product introduction since 2001.

The collection is targeting muti-generational consumers who are both classic and stylish in their taste, Frankfort has said.

It “is in many ways back to the future,” he said in June.

The coupons indicate that Legacy “may be off to a slow start,” Corinna Freedman, an analyst with Wedbush Securities in New York, said in a phone interview.

Coach generates about 70 percent of its sales from North America, making home-market demand the most important near-term investment consideration, Christian Buss, an analyst with Credit Suisse Group AG (CSGN) in New York, wrote last month in a report downgrading the stock.

‘Investment Year’

Frankfort warned in July that Coach’s results in its current fiscal year -- which he called “an investment year” -- would be reduced by accelerated acquisitions and increased spending on e-commerce. Still, on the call, he expressed confidence that Coach could “drive our business at a double- digit pace.”

Coach said its North American handbag and accessory sales in its own stores and through its website rose “similarly” to the total market’s 10 percent growth rate in the company’s most recent fiscal year. A year earlier, such sales increased 17 percent, surpassing the market’s 10 percent gain.

“If they are only growing at the rate of the handbag category, they are no longer a high-growth company,” Freedman said. “So where does that leave Coach, because it has been 10 years of high-flying growth? The growth multiple they used to garner is at risk.”

‘Valuation Sensitive’

Coach, which traded at an average of about 18.6 times estimated earnings per share in the past seven years, is going to become much more “valuation sensitive,” said Freedman, who rates the shares neutral, the equivalent of a hold.

The stock traded at about 14.6 times estimated earnings as of Oct. 19, a 30 percent discount to Ralph Lauren Corp. (RL) and a 62 percent discount to Kors, whose sales in the current fiscal year may gain more than 52 percent to $1.97 billion, the average estimate of 11 analysts.

Other analysts who cut Coach to the equivalent of hold in recent months include Eric Beder at Brean Murray Carret & Co. and Randal Konik at Jefferies & Co. As a result, the percentage of analysts who recommend buying Coach has fallen to 71 percent from 81 percent before July 31, data compiled by Bloomberg shows.

Analysts’ average 12-month target share price was $67.08 at the close of trading Oct. 19, when the shares finished at $56. That target had topped $80 earlier in the year.

‘Entry Point’

The recent declines offer “an attractive entry point,” according to Laura Champine, a New York-based analyst at Canaccord Genuity Corp., who upgraded the shares to buy from hold on Aug. 7.

“Coach has a tremendous management record of knowing their brand,” David Schick, a Baltimore-based analyst with Stifel Financial Corp. (SF) who recommends buying the shares, said in a phone interview. “I would point to the longer-term.”

However, the short-term trends may indicate a long-term problem, according to Wedbush’s Freedman.

Coach earlier this month still was honoring a Facebook promotion that had been due to expire Sept. 16, she said. Buss saw longer-lasting Coach promotions at retailers such as Macy’s Inc. (M) and Dillard’s Inc. (DDS) this fall. While Coach offered 25 percent off a single item at its full-price stores in September 2011, last month it offered that discount off an entire purchase, Freedman said. Coach also has sent e-mails touting its factory outlet clearance merchandise on EBay, she said.

“They are having to work a little harder to get their customers in the stores,” Freedman said. “We’re just nervous about what that means for the brand (BRND) over the longer-term. We think they are losing market share to nearly everyone. The handbag segment has become much more fragmented and much more competitive than it was in Coach’s heyday.”

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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