Coach: Encouraged by New Product but Brand Evolution Will Take Time

Coach will report first-quarter earnings before the markets open on October 28. We expect an in-line quarter, with a negative 26% comp given more tempered promotional activity and the lack of new product until mid-September. We believe new fall product will be the primary focus on the call, and while we are encouraged by the design and believe early interest has been positive (see analysis starting on page 2), we do not believe it has materially moved the financial needle. We remain on the sidelines until we see greater traction with the company’s transformation, with the caveat that we expect shares to move up on any moderation in sales declines. While guidance calls for a steady high-20s negative comp through the year, comparisons step down materially in the second half. Regardless of easy comps, our 2014 Handbag Survey (published today alongside this note) shows that forward purchase intent remains weak for Coach while brand promotion has slipped compared with last year, putting additional pressure on new product. Shares meanwhile have embedded some hope of an impending recovery, trading at 19.5 times our fiscal 2015 EPS estimate of $1.85, a premium to the apparel and accessories group’s one-year-forward average multiple and ahead of the company’s long-run average of 17.7 times.

Our sales estimate of $1,018 million is modestly ahead of the Street at $1,004 million, and represents a total year-over-year decline of 11.5% as new openings offset our expected same-store sales decline of 26%, where we are relatively in line with the Street estimate of 25.5%. Our gross margin estimate for the quarter of 69% compares with consensus of 70%, and represents a 280-basis-point decline year-over-year. Notably, we expect the first quarter to be affected by the company’s shift in promotional strategy in which a semi-annual sale pulled sales into June, while during the remainder of the quarter promotional activity was absent in full-price stores. Furthermore, new product did not hit stores until mid-September with only two weeks of selling before quarter-end. This will be somewhat augmented by the pullback in EOS promotional cadence, which will accelerate throughout the year.

While management does not consistently provide quarterly guidance, at its June analyst day, the company indicated that total sales for full fiscal year 2015 are expected to be down in the low double digits, including a negative high-teens comp in full-line plus an additional 10-point impact from the pullback in EOS promotions (guidance essentially assumes EOS declines from a $400 million business to about $100 million). For the year, we forecast total sales of $4,275 million, down 11.1% year-over-year and relatively in line with the Street at $4,266 million. We expect overall sales growth to improve slightly in the back half of fiscal 2015 as the company laps easier comps and new factory product arrives toward the second half, but with modest expectations for new full-price product at this point until we see greater traction. Ahead of earnings, we forecast a steady negative 26% same-store comp through the year, in line with guidance. Our gross margin estimate for the year of 69.6% compares with guidance of 69%-70% and consensus of 69.7%.

Coach: Encouraged by New Product but Brand Evolution Will Take Time was last modified: October 26th, 2014 by Seth Talluto

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