Is Coach Derailing? - Analyst Blog

It seems that investors are losing confidence in Coach, Inc. COH, after this designer and marketer of fine accessories and gifts, posted soft third-quarter fiscal 2014 results. Shares of this Zacks Rank #3 (Hold) company have dropped 11.5% since the earnings announcement on Apr 29, whereas year-to-date, the stock has fallen 27.2%. Yesterday, the stock reached a 52-week low of $40.34.

Estimates for Coach have been portraying a downtrend since the company delivered third-quarter results. It seems that analysts have become less constructive on the stock's future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that tumbled 3.8% to $3.05 for fiscal 2014 and 19.2% to $2.78 per share for fiscal 2015 in the past 60 days.

The New York-based company disappointed on the sales front that declined 7% to $1,099.6 million — after decreasing 6% during the second quarter — due to sluggishness in the North American market, and also fell short of the Zacks Consensus Estimate of $1,134 million.

Management stated that torpidity in the North American women's bag and accessories business offset sturdy growth witnessed in men's, footwear and strong results across Asian and European markets. Adverse weather conditions and a shift in the Easter holiday also impacted the results. Coach witnessed lower footfall in stores, while online results were unfavorably impacted by the company's decisions to eliminate third party events, and restrict the accessibility to factory flash site.

Fashion obsolescence remains a major concern for Coach's business model, which involves a sustained focus on product and design innovation. The company's pioneering position could be affected by delays in product launches as it operates in the highly competitive premium handbag and accessories segment.

However, what is still providing some cushion to the stock is the better-than-expected bottom-line result, wherein earnings of 68 cents a share beat the Zacks Consensus Estimate by 7.9% but tumbled 19% year over year.

We believe Coach's focus on investing in stores to enhance store sales productivity through product innovation, a compelling pricing strategy and new merchandise assortments may act as catalysts. The company remains optimistic about its dual-gender Legacy lifestyle collection, dedicated men's stores and international growth opportunities to counter the soft consumer scenario.

Other Stocks Worth Considering

Other better-ranked retail stocks that look promising and are expected to continue with their upbeat performance include Columbia Sportswear Company COLM, Hanesbrands Inc. HBI and V.F. Corporation VFC all holding a Zacks Rank #2 (Buy).