(COH) Coach Analyst Keeps Shares at Neutral

Being a leading American marketer of fine accessories and gifts, Coach Inc. (COH) boasts of a proven strategy of investing in stores to enhance store sales productivity through product innovation, compelling pricing strategy, new merchandise assortments, and a cost-effective global sourcing model, which should help drive comparable-store sales and operating margins in the long term.

Management remains confident of sustaining double-digit growth in both top and bottom lines, after posting better-than-expected third-quarter 2011 results on the back of healthy sales in North America and China.

Coach’s long-term growth drivers include expansion of its global distribution model and entry into under-penetrated markets. It is also investing in rapidly growing emerging markets, such as China, to increase its brand awareness.

Coach maintains a healthy balance sheet with significant cash balance and negligible debt load. The company also has been proactively managing its cash flows by making prudent capital investments and enhancing shareholders’ return. The company’s strong liquidity positions it to drive future growth.

The company ended third-quarter 2011 with cash, cash equivalents and short-term investments of $886.2 million, total long-term debt of $24.2 million and shareholders’ equity of $1,742.7 million. Coach also notified that it bought back approximately 3.53 million shares at a cost of $54.51 per share, aggregating $192 million during the quarter.

The company still has $1.3 billion at its disposal under its previous share repurchase authorization. The company also raised its annual cash dividend by 50% to 90 cents a share.

Coach sells products that are discretionary in nature. The company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.

Fashion obsolescence remains the main concern for Coach’s business model, which requires sustained focus on product and design innovation. The company’s pioneering position may be compromised by delays in its product launches.

At present, we remain concerned about Coach’s operations in Japan. The company highlighted that the recent devastation in Japan hurt third-quarter 2011 sales by $20 million and earnings by 2.5 cents a share and further indicated that it would lose additional $20 million in the top-line and between 2 cents and 3 cents a share in the bottom-line during the fourth quarter.

Given the pros and cons, we prefer to have a long-term Neutral recommendation on the stock. Moreover, Coach, which competes with Polo Ralph Lauren Corporation (RL), holds a Zacks #3 Rank that translates into a short-term Hold rating, correlating with our long-term view.

COACH INC (COH): Free Stock Analysis Report

POLO RALPH LAUR (RL): Free Stock Analysis Report

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