Coach's Strategic Endeavors On Track: Should You Hold COH?

Coach, Inc. (NYSE:COH) is undergoing a brand transformation and introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman has been accretive to its performance, and is being viewed as a significant step in its efforts toward becoming a multi-brand company. Moreover, management has undertaken transformation initiatives revolving around product, stores and marketing.

The company remains optimistic about its dual-gender Legacy lifestyle collection, dedicated men's stores and international growth opportunities. It is also aggressively expanding its E-commerce platform. Management indicated that sales from the Men’s business came in at approximately $700 million in fiscal 2015. Coach expects to generate sales of about $1 billion from its global Men's business in fiscal 2017.

The company’s long-term growth drivers include expansion of its global distribution model and venturing into under-penetrated markets. Further, Coach is on track to streamline its North American operations and expects to deliver positive comparable-store sales by the fourth quarter of fiscal 2016.

Hurdles

Coach sells products that are discretionary in nature, and thus depends upon consumers’ disposable income, which is sensitive to macroeconomic factors. Fashion obsolescence also remains the main concern for the company’s business model, which involves a sustained focus on product and design innovation.

Coach also generates a significant amount of net sales outside the U.S. Due to high exposure to international markets, the company remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require it to either raise prices or contract profit margins in locations outside the U.S. An increase in price may have an adverse impact on the demand for products. Management cautioned that foreign currency headwinds would hurt revenue growth by 225−250 basis points in fiscal 2016.

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Endnote

As one of the leading American marketers of fine accessories and gifts, Coach boasts a proven strategy of investing in stores to enhance their sales output through product innovation, a compelling pricing strategy, new merchandise assortments, and a cost-effective global sourcing model. We believe that these strategies will help drive comparable-store sales and operating margins in the long term. However, given the pros and cons embedded, the stock currently carries a Zacks Rank #3 (Hold).

Stocks that Warrant a Look

Investors interested in the retail space may consider some better-ranked stocks such as Carter's, Inc. (NYSE:CRI) , sporting a Zacks Rank #1 (Strong Buy), and Delta Apparel Inc. (NYSE:DLA) and The Children's Place, Inc. (NASDAQ:PLCE) , both holding a Zacks Rank #2 (Buy).