Coach Downgraded At Morgan Stanley As Turnaround Tears At The Seams

Although Coach Inc COH reported Q4 comp of +2 percent, there are concerns surrounding the sustainability of the turnaround, Morgan Stanley’s Kimberly C Greenberger said in a report. She downgraded the rating on the company from Equal-weight to Underweight, while maintaining a $32 price target.

Coach achieved its FY16 financial targets, including a return to positive comps in Q4 and EBIT margin in the mid-to-high-teens range.

Concerns Over Turnaround Quality

Analyst Greenberger pointed out that the so-called turnaround was achieved “in an unhealthy manner.” She explained that a turnaround should include either sales growth with stable margins or stable sales with margin expansion; “however Coach has not proven it can deliver either of these.”

Coach’s outlet channel increased promotional activity throughout the year to achieve the increase in comps. The Q4 turnaround was accompanied by merchandise margin contraction of more than 300bps due to this promotional activity.

“Coach has not grown North America gross profit dollars in a single quarter since the company began disclosing it three years ago. International gross profit and operating income dollars are growing +L-MSD, but investors are paying for a North America turnaround, not an international one,” Greenberger wrote.

While a turnaround may have occurred in the North American full price channel, with positive comps and lower discounting, this accounts for at most ~20 percent of total global revenue, which is “not big enough to matter,” the analyst commented.

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