Earnings Preview: Coach - Analyst Blog

Coach Inc. (COH), the designer and marketer of fine accessories and gifts, is scheduled to report its second-quarter 2011 financial results on January 25, 2011. The current Zacks Consensus Estimate for the quarter is 97 cents a share. For the quarter under review, revenue is pegged at $1,202 million, according to the Zacks Consensus Estimate.

First-Quarter 2011, a Synopsis

Coach posted better-than-expected first-quarter 2011 results on October 26, 2010, on the back of healthy sales in North America, China and Japan.

The quarterly earnings of 63 cents a share beat the Zacks Consensus Estimate of 55 cents, and surged 43.2% from 44 cents delivered in the prior-year quarter buoyed by strong top-line growth and competitive pricing.

The New York based company, Coach, said that total net sales for the quarter came in at $911.7 million, up 19.7% from the year-ago quarter, and breezed past the Zacks Consensus Revenue Estimate of $847 million.

The rise in sales was a positive indication for the luxury-goods market, battered by the recent economic downturn. Coach, the maker of handbags, wallets, shoes and other accessories, hinted that its merchandising, marketing and strategic pricing initiatives helped it keep afloat in a difficult consumer environment.

Second-Quarter 2011 Zacks Consensus

Analysts considered by Zacks expect Coach to post second-quarter 2011 earnings of 97 cents a share. The current Zacks Consensus Estimate reflects a growth of 29.3% from the prior-year quarter earnings. The current Zacks Consensus Estimates for the quarter range between 92 cents and $1.01.

Zacks Agreement & Magnitude

Of the 20 analysts following the stock, 3 analysts have revised their estimates upward in the last 30 days, and only one analyst raised the estimate in the last 7 days. This led to an increase in the Zacks Consensus Estimate for second-quarter 2011. The Estimate moved up a penny to 97 cents from 96 cents.

Positive Earnings Surprise History

With respect to earnings surprises, Coach has topped the Zacks Consensus Estimate over the last four quarters in the range of 4.2% to 14.6%. The average remained at 10.4%. This suggests that Coach has beaten the Zacks Consensus Estimate by an average of 10.4% in the last four quarters. Given the past performance we expect the company to outperform the Zacks Consensus Estimate.

Coach in Neutral Lane

Coach boasts of a proven strategy of investing in stores to enhance store sales productivity through product innovation, compelling pricing strategy, new merchandise assortments, and a cost-effective global sourcing model, which should help drive comparable-store sales and operating margins in the long term.

Management also remains confident of sustaining a double-digit growth momentum in both top and bottom lines, after posting better-than-expected first-quarter 2011 results on the back of healthy sales.

The company's long-term growth drivers include expansion of its global distribution model and venturing into under-penetrated markets. After North America and Asia, Coach now plans to extend its global footprint in Western Europe. It is also investing in rapidly growing emerging markets, such as China, to increase its brand awareness.

Coach maintains a healthy balance sheet with a significant cash balance and negligible debt load. The company ended first-quarter 2011 with cash, cash equivalents and short-term investments of $712 million and total long-term debt of $24.8 million and shareholders' equity of $1,582.7 million.

The company also has been actively managing its cash flows by generating significant free cash, making prudent capital investments and enhancing shareholders' return. Coach's strong liquidity positions it to drive future growth.

Coach sells products that are discretionary in nature. The company's customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company's growth and profitability.

Fashion obsolescence also remains the main concern for Coach's business model, which requires a sustained focus on product and design innovation. The company's pioneering position may be compromised by delays in its product launches.

Given the pros and cons we prefer to be ‘Neutral' on the stock. Moreover, Coach, which competes with Polo Ralph Lauren Corporation (RL), holds a Zacks #3 Rank that translates into a short-term ‘Hold' rating, correlating with our long-term recommendation.