Coach Inc (NYSE:COH) is a retail stock with a lot of baggage.
In the 2007-09 downturn, COH stock plummeted as customers – even wealthier ones – watched their spending cash evaporate. Since then, Coach stock made a comeback in 2012 selling at nearly $80 a share — about 50% more than its current share price . But now, it’s on the decline again while many of its competitors are looking up.
Coach reported second-quarter revenues that dropped 14% year-over-year, hurt in large part by U.S. same-store sales that tanked 22%.
Meanwhile, competitor Michael Kors Holdings Ltd (NYSE:KORS) was looking a lot better.
Michael Kors reported holiday net sales that grew 37% on North American same-store sales that improved 6%.
Since its 2012 peak, Coach has been trying to bounce back with plans for revamping its stores and overall brand. However, investors likely won’t see any positivity in Coach stock for at least another year.
Let’s look at why COH stock won’t impress in 2015.
Coach Just Isn’t as Upscale: When Coach lowered the prices of its handbags and created a bargain mart in its outlet stores, it created the idea that Coach wasn’t as upscale anymore. Sure, Coach’s handbag quality was just as good, but its low prices weren’t flying with shoppers who want the best (most expensive). While Coach was slashing prices and gaining most of its sales from outlet stores, Michael Kors was gaining clout among luxury lovers.
Transition Hinders Coach Stock: Coach will spend most of 2015 revamping its stores. COH plans to renovate stores in 150 locations and open up 60 stores globally — all of which should have a more “modern feel” to them. However, while this could be good news for COH in the long run, renovations and openings can weigh on the bottom line in the short term. Not to mention, there’s no guarantee that new storefronts will be enough to bring lost customers back.
Misled Spending: Coach, a $10 billion company, spent more than $500 million on the acquisition of shoemaker Stuart Weitzman. It’s a big investment, but one that probably won’t pay off in the long run. Coach is known for its handbags, but not so much its shoes. In fact, shoes and other items make up only 7% of Coach’s sales, so Weitzman isn’t necessarily the most natural fit. Moreover, the acquisition is expected to generate about $300 million in annual revenues — not a significant addition compared to the $4.8 billion in revenues it did last year.
Paying for Nothing: Despite all these troubles, Coach is actually more expensive than Michael Kors and other luxury names right now. COH is trading at roughly 20 times next year’s earnings vs. 15 for KORS and 12 for Fossil Group Inc (NASDAQ:FOSL).
Bottom Line
Coach will be spending most of 2015 getting back up on its feet, and at some point, COH stock might be worth buying. But investors should wait until Coach’s transformation is closer to completion.
As of this writing, Dana Kobilinsky did not hold a position in any of the aforementioned securities.
