We maintain our underperform recommendation on Coach, Inc. (COH), the maker of handbags, wallets, shoes and other accessories, with a target price of $44.00. Our bearish stance on the stock is also supported by its Zacks Rank #5 (Strong Sell). So far in the year, the stock has dipped 13.6%.
Why the Reiteration?
Coach sells products that are largely discretionary in nature and thereby depend upon consumers’ disposable income. Consumers in turn are highly sensitive to macroeconomic factors. Given the difficult consumer spending environment in the past couple of quarters, things have become a little difficult for Coach.
The company reported dismal second-quarter fiscal 2014 results. The company came up with disappointing sales that declined 6% to $1,419.6 million — after dipping 1% during the first quarter — due to sluggishness in the North American market and also fell short of the Zacks Consensus Estimate of $1,501 million.
The bottom line also failed to impress investors, as quarterly earnings of $1.06 per share missed the Zacks Consensus Estimate of $1.11 and tumbled 13.8% from the prior-year quarter.
The softness in results triggered a downtrend in the Zacks Consensus Estimate, as analysts became less constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that fell 6.6% to $3.24 for fiscal 2014 and 7.1% to $3.54 per share for fiscal 2015 in the past 7 days.
Fashion obsolescence remains a major concern for Coach’s business model, which involves a sustained focus on product and design innovation. The company’s pioneer position could be affected by delays in product launches. It is noteworthy that the company operates in the highly competitive premium handbag and accessories segment.
Stocks that Warrant a Look
Better-ranked retail stocks that look promising and are expected to sustain their upbeat performance include G-III Apparel Group, Ltd. (GIII) sporting a Zacks Rank #1 (Strong Buy), along with Gildan Activewear Inc. (GIL) and Michael Kors Holdings Limited (KORS), both of which hold a Zacks Rank #2 (Buy).