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Should I Buy Coach? 3 Pros, 3 Cons

The U.S. market could be a drag on the luxury company


Hot luxury stock Coach (NYSE:COH) has been losing steam this year. In the fiscal fourth quarter, sales increased by a disappointing 12% to $1.16 billion, while The Street had been looking for $1.2 billion.

For 2012, shares of the accessory-maker are off by more than 5% to under $58 — certainly a stark contrast to its long-term performance. For the past decade, the average annual return is an astounding 25%.

So is the recent stumble a temporary thing? Or is there something more serious at work? To decide, let’s take a look at the pros and cons:


Distinctive Brand. Coach is a name that customers will pay a premium for. What’s more, it has been quite versatile, as the company sells a variety of accessories including bags, footwear, scarves, sunwear, fragrances and fine jewelry.

New Businesses. To find growth, Coach has been investing in new categories. Perhaps the most interesting is  its men’s division, which doubled sales in fiscal-year 2012 to over $400 million. Part of the strategy has been creating men-focused stores, butCoach has also started to add the male-focused merchandise in its main locations as well. Plus, the company is getting more serious about its digital efforts. A key element is leveraging database marketing and social media.

Asia. Coach has 187 locations in Japan, which has seen traction with the men’s business. The company also purchased businesses in Singapore, Malaysia and Taiwan. However, China remains the main focus for Coach. In the latest quarter, the company added 11 net new locations for a total of 96. Sales were up about 60%.


Macroeconomy. Coach is feeling lots of pressure in North America, where revenues increased by 5% in the latest quarter. In fact, comparable-store sales were a mere 2%. To help things out, Coach has been ramping its promotional efforts with couponing, for example. Unfortunately, it looks like the U.S. economy will remain weak for a while.

Competition. Of course, competition is brutal. Coach must compete against brands like Michael Kors (NYSE:KORS), Louis Vuitton (PINK:LVMUY) and Gucci Group.

Fad? This is always the fear for a luxury brand. Even though Coach has been around for some time, there is always the possibility that consumers will get tired of the concept, or that the company will fail to adapt to what customers want. The discounting of its products in North America is certainly an ominous sign.


Coach has made some smart moves, including its efforts in Asia. It also helps that the company has built its men’s business.

Yet in the next year or so, Coach is likely to feel the impact of a slowing U.S. economy. China is showing weakness as well, and there may even be the added problem of customer fatigue.

So in light of all these factors, it is probably better for investors to hold off on the stock for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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