Jefferies Has Further Confidence In Coach's Turnaround Story

Jefferies hosted a meeting with Coach Inc COH’s management on Wednesday and left feeling confident in the company’s turnaround story. Consequently, analysts led by Randal J. Konik and Edward Plank reiterated a Buy rating and $51 price target on the stock.

According to a note issued Thursday, the experts clearly see Coach as “a well-oiled machine highly capable of identifying and executing the right strategies.” As brand momentum continues to build, products resonate increasingly, and the organization becomes more agile, they believe the company is in the right track to higher revenue and earnings.

The analysts pointed out a few elements to back their Buy recommendation.

First off, they noted that in an industry that has not seen much product innovation recently, Coach “is doing an outstanding job differentiating itself and elevating its brand under the direction of Creative Director Stuart Vevers.”

They then went into the company’s factory channel, which has been growing at a slower rate than full-price channels. Management has assured that the sequential improvement has been significant, and that they expect this to continue. This led Jefferies to believe the factory channel is “poised to inflect.”

Plans for international expansion in Europe and Asia – especially China - have impressed the team. “In addition to an expanding footprint (including a flagship strategy in major cities) that should help drive brand awareness, we like that the company has flexibility in its supply chain, allowing it to reallocate product to regions with highest demand,” the report read.

Finally, the analysts expect margins (gross margin currently stands around 69 or 70 percent) to remain healthy and continue to improve, “driven by stronger product (higher price points + lower promos), cost leverage off an improving top-line, and a more nimble operating structure.” Operating margins could reach 20 percent by fiscal 2017, and the mid 20s over the longer term, the report concluded.