Ticker: COH
Sector:
Consumer Goods
Industry: Textile – Apparel,
Footwear & Accessories
COACH
I. Coach and its Market
Description
Recommendation:
Pricing
Closing Price
52-wk High
52-wk Low
Market Data
Market Cap
Total assets
Trading vol
Valuation
EPS (ttm)
P/E (ttm)
BUY
$47.05
$47.28
$25.18
$17.28B
$1.6B
3,449,380
(3mon avg)
$1.52
30.88
Profitability & Effectiveness (ttm)
ROA
13.96%
ROE
21.94%
Profit Margin 8.74%
Oper Margin 13.25%
Gross Margin 44.00%
AMANDA YODER
alyoder@mizzou.edu
Founded in 1941, Coach Inc. is a designer and marketer
of high-quality, modern American classic accessories. Coach's
primary product offerings include handbags, accessories,
business cases, outerwear and related accessories and weekend
and travel accessories. Coach targeted international markets.
Coach's primary product offerings include handbags,
accessories, business cases, outerwear and related accessories
and weekend and travel accessories. Together with its licensing
partners, Coach also offers watches, footwear, eyewear and
office furniture with the Coach brand name. Coach's products
are sold through a number of direct-to-consumer channels,
which at the end of fiscal 2005 included: 193 North American
retail stores; 82 North American factory stores, the Internet; and
the Coach catalog. Coach's remaining sales were generated from
products sold through a number of indirect channels, which at
the end of fiscal 2005 included: approximately 1,000 department
store locations in the U.S.; 94 international department store,
retail store and travel shopping locations in 19 countries; 103
department store shop-in-shops, and retail and factory store
locations operated by Coach Japan, Inc.; and Business to
business. Over the last several years, Coach has successfully
transformed itself from a manufacturer of traditionally styled
classic leather products to a marketer of modern, fashionable
handbags and accessories using a broader range of fabrics and
materials. Along with the rejuvenation of the product line,
Coach has created a similarly modern environment to showcase
its product assortment and reinforce a consistent brand position.
Finally, Coach has established a flexible, cost-effective sourcing
model in which independent manufacturers supply virtually all
of its products, allowing Coach to bring its broader range of
products to market more rapidly and efficiently. Coach's
Products includes: Handbags: Coach's original business, the
design, manufacture and distribution of fine handbags,
accounted for approximately 64% of net sales in fiscal 2005.
Coach makes monthly offerings of its handbag collections,
featuring classically inspired designs as well as fashion trend
designs. Typically, there are three to four collections per quarter
and four to seven styles per collection, depending on the concept
and opportunity. Accessories: Women's accessories, consisting
1
of wallets, wristlets, cosmetic cases, key fobs and belts, represented approximately 20% of
Coach's net sales in fiscal 2005. Coach's small leather goods collections are coordinated with
handbags. Men's accessories, consisting of belts, wallets and other small leather goods. Business
Cases: This category includes computer bags and messenger-style bags, as well as men's and
women's totes. Outerwear, Gloves, Hats and Scarves: The assortment is approximately 88%
women's and contains a fashion assortment in all four components of this category. Weekend and
Travel Accessories: The Coach weekend and travel collections are comprised of cabin bags,
duffels, suitcases, garment bags and a comprehensive collection of travel accessories. Watches:
Movado Group, Inc. has been Coach's watch licensee since 1998 and has developed a distinctive
collection of watches inspired by both the women's and men's collections. These watches are
primarily manufactured in Switzerland and are branded with the Coach name and logo.
Footwear: Jimlar Corporation has been Coach's footwear licensee since 1999. Approximately
98% of this business is in women's footwear, which coordinates with Coach handbags and
employs fine materials, including calf and suede. Eyewear: In the fall of 2003, Coach eyewear
was launched with Marchon Eyewear as the licensee. The eyewear collection is a collaborative
effort from Marchon and Coach that combines the Coach aesthetic for fashion accessories with
the latest fashion directions in eyewear and sunglasses. As of July 2, 2005, Coach employed
approximately 5,700 people. 2
1
2
www.yahoo.finance.com
www.marketwatch.com
Market Position
Coach holds a very competitive position within its markets. It holds the largest market
capitalization in the apparel and accessories industry of consumer goods. Its market cap is twice
that of its closest competitor Ralph Lauren. Coach also has a high growth rate in recent years
and is expected to continue to grow despite new entrants to the hand bag market. This growth
rate is well behind the industry leader (who is a new company still in early growth stage) but is
still ahead of its three major direct competitors in revenues (these competitors are privately held
and total revenue is one of few indicators supplied). For a company who has been around for
almost thirty years, this is a good growth rate. As they carefully expand their line of products
into different accessories that fit their current consumer markets needs, we can expect to see
earnings continue to grow as analysts predict. Analysts have a positive outlook for Coach in
several areas. With their recent quarterly earnings higher than expected, and many analysts
increasing estimates of future earnings, they are showing good signs in the market. These
positive aspects have led to many buy ratings from analysts (while some analysts recommend
holding, not recommend a sell).
There has been concern expressed about their high growth rate though. In several recent
articles there has been gushing praise for the growth rate of Coach and its talent to continue to
grow despite new entrants into the handbag market. However, a few companies have
downgraded their ratings to neutral as they fear that Coach has been growing by too much and
will not be able to sustain this for much longer. However, most have positive predictions and
increased earnings estimates which have led Coach to increase its estimate of new stores to be
opened this year.
2
II. The Competitive and Economic Environment
Competition
Coach, Inc. has three close competitors within the industry of Textiles – Apparel,
Footwear & Accessories: Dooney & Bourke, Kate Spade, and Michael Kors. All three
competitors of Coach are privately held companies and it is not possible to obtain information
upon which to make comparisons. Dooney & Bourke makes high-end women's handbags and
accessories sold in department stores (such as Macy's and Nordstrom), online, and by catalog. It
also operates about 10 of its own stores nationwide, including a flagship location in Manhattan.
Best-known for its distinctive initial-covered fabric purses, the company also makes cell phone,
iPod, and PDA cases, hats, jewelry, luggage, men's and women's apparel, shoes, tote bags,
wallets, and assorted accessories. 1 This company is still run by CEO Frederick Bourke and
President Peter Dooney.
kate spade's story is one of simplicity, like the bags it sells. Begun by designer Kate
Spade and her husband, Andy, in 1993, signature kate spade bags were an instant success
because of their uncomplicated design. Since then, the company has expanded into stationery,
various functional bags (think diaper bags), and now, licensing that brings to the world a line of
homewares, including sheets, tablewares, and wallpaper, as well as beauty products, eyewear,
and shoes. kate spade's products are distributed through more than 20 of its own stores and in
upscale department stores, including those of its owner Neiman Marcus. Neiman's has sold the
company to Liz Claiborne for about $124 million. kate spade is still run by Andy Spade with
Kate Spade as lead designer. 1
Michael Kors dresses the stars, both real and imagined. The company designs and
distributes high-fashion apparel and footwear for men and women. It added timepieces to its
offerings through a licensing deal with Fossil, eyewear through a license with Marchon Eyewear,
swimwear through a licensing deal with Warnaco Swimwear, and socks via a license with
American Essentials. The company makes the MICHAEL Michael Kors collection. Michael
Kors, himself, owns about 15% of the firm, while Sportswear Holdings, the holding company
owned by fashion investors Silas Chou and Lawrence Stroll, bought an estimated 85% of the
company in 2003. 1
1
www.yahoo.finance.com
Economic Factors
The Textile – Apparel Footwear & Accessories industry moves in a positively correlated
direction with the economy. However, within this industry, some companies are more affected
by a recessive economy because of their lower to middle income target markets. Many of these
companies see reduced sales with a slow-down in the economy. Because Coach is a luxury item,
it suffers less from changes in economic conditions. Their target market is geared to higherincome markets that have adequate discretionary income even in tighter times. This is a position
to be watched as Coach offers lower priced goods and products that are below $200 to reach a
3
broader market, we need to make sure that they do not fall out of their luxury good status. The
first graph below shows how Coach has been able to outperform the S&P for the last 5 years and
has gradually increased this difference over this time period. The second graph gives a short
look at how Coach has been able to outperform the industry as well.
4
III. Valuation of Coach
In valuating the firm I looked at two different models. I first looked at Warren Buffet’s
Owner’s Earnings Model. For this model I used a discount rate of 10.51%. This was taken from
the risk free rate of 4.91 (30 yr. Treasury Bond), market risk premium of 4.19%, and a company
beta of 1.36 (1.08, 1.08, 1.90). This beta was obtained through an average of analyst betas from
msn.com, finance.yahoo.com, and reuters.com.
Re = Rf + beta(Rm)
10.51 = 4.91 + 1.366(4.1)
Warren Buffett’s Owner’s Earnings Discount Model: Appendix A
While this valuation is very simple and can produce very volatile prices it gives a pretty
good estimate of Coach’s position over the next several years. Because most analysts are
estimating that Coach will continue to grow at about 28% over the next 5-10 years, I used this
growth rate to find a price of about $100. However, I also looked at slightly more conservative
growth rates as it is hard to completely accurately predict where a company will be in 10 years.
These growth rates (until dropping below 18%) showed that Coach is an undervalued company.
Discount Rate = 10.51%
Frist Stage Growth
Conservative = 15%
Moderate = 20%
Analyst Estimate = 28%
Second Stage Growth = 3%
Intrinsic Value Per Share
$
39.66
$
56.86
$
100.29
Relative Valuation
The chart below outlines several different ratios by which to compare Coach to the
industry as a whole and the S&P 500. This relative valuation would be much more effective if
there were direct competitors to Coach that we could include, but all direct competitors are
privately held and no information is available for these companies.
There are few key ratios to look at below. Those highlighted in green are strengths of
Coach and those highlighted in lavender are ratios that should be noted due to risk to the
company, or explanations for certain numbers.
Coach has a strong Price to Earnings ratio. Although a high P/E ratio can be looked upon
negatively in some situations, with a high growth company like Coach, this is a positive ratio.
Also, their Price to Sales ratio is extremely strong and has been growing rapidly since 2001.
Along with this, the cash per share has also increased almost ten fold. They also have very
strong sales numbers in comparison to the industry and these numbers continue to grow. Along
5
with the strong growth in sales, they have experienced equally strong growth in their profit
margins.
While Coach has sustained strong growth over the last few years, it has done this with
little to no debt as is shown by the low debt to equity ratio. This ratio is much lower than the
industry average.
A few ratios to look at because of their possible negative effects are the beta, price to
book, price to tangible book, the quick ratio, and inventory turnover. The beta for Coach from
many sources is calculated to be close to 1, however, there are some sources who calculate
Coach’s beta closer to 1.9. An average of these calculates to about 1.2. Also of note is the
company’s price to book value and price to tangible book value. These two ratios are relatively
high compared to the industry and S&P. While many other factors point toward Coach being
undervalued, these higher ratios imply that Coach is not undervalued.
Coach also has a relatively high quick ratio, however, it is below the industry average.
Taking into account the debt to equity ratio, this is not a ratio to weigh heavily on.
Coach is a consumer goods company that sells handbags. Therefore these handbags
(inventory) are their bread and butter. Compared to the industry it would appear that Coach has
a very low inventory turnover ratio compared to the industry. This is never a good sign, but in
the case of Coach, it is not something to be concerned about because of the type of merchandise
that Coach carries and the fact that their products are not as subject to market whims and fashion
tastes.
P/E Ratio (TTM)
P/E High - Last 5 Yrs
P/E Low - Last 5 Yrs
Beta
Price to Sales (TTM)
Price to Book (MRQ)
Price to Tangible Book (MRQ)
Price to Cash Flow (TTM)
Price to Free Cash Flow (TTM)
Dividend Yield
Dividend Yield - 5 Yr Avg
Dividend 5 Yr Growth Rate
Payout Ratio (TTM)
Sales (MRQ) vs Qtr 1 Yr Ago
COMPANY
VALUATION RATIO
31.20
34.20
10.60
1.08
7.20
14.54
18.05
29.10
36.50
DIVIDENDS
0.00
0.00
NC
0.00
28.60
INDUSTRY
S&P 500
22.00
29.10
14.80
0.75
1.99
4.80
5.64
17.60
36.10
20.40
50.30
16.70
1.00
1.67
3.19
6.13
13.70
160.60
0.70
0.60
-10.94
15.00
11.10
1.80
1.70
8.44
31.00
5.30
6
Sales (TTM) vs TTM 1 Yr Ago
23.40
6.40
GROWTH RATES (%)
Sales - 5 Yr Growth Rate
27.99
1.64
EPS (MRQ) vs Qtr 1 Yr Ago
30.60
12.20
EPS (TTM) vs TTM 1 Yr Ago
31.90
12.40
EPS - 5 Yr Growth Rate
47.50
8.54
Capital Spending - 5 Yr Growth Rate
43.02
10.84
FINANCIAL STRENGTH
Quick Ratio (MRQ)
1.50
1.80
Current Ratio (MRQ)
2.60
2.90
LT Debt to Equity (MRQ)
0.00
0.09
Total Debt to Equity (MRQ)
0.01
0.13
Interest Coverage (TTM)
NC
75.10
PROFITABILITY RATIOS (%)
Gross Margin (TTM)
82.30
47.80
Gross Margin - 5 Yr Avg
78.10
45.50
EBITD Margin (TTM)
36.90
16.30
EBITD - 5 Yr Avg
35.40
14.50
Pre-Tax Margin (TTM)
33.20
11.80
Pre-Tax Margin - 5 Yr Avg
20.20
7.70
MANAGEMENT EFFECTIVENESS (%)
Net Profit Margin (TTM)
34.60
14.50
Net Profit Margin - 5 Yr Avg
27.20
12.40
Return on Assets (TTM)
48.50
20.70
Return on Assets - 5 Yr Avg
37.10
17.60
Return on Investment (TTM)
48.60
22.60
Return on Investment - 5 Yr Avg
37.30
19.80
EFFICIENCY
Revenue/Employee (TTM)
1 Mil.
397,080
Net Income/Employee (TTM)
251,990
37,127
Receivable Turnover (TTM)
21.50
7.70
Inventory Turnover (TTM)
1.60
3.80
Asset Turnover (TTM)
1.50
1.60
2.10
6.04
17.20
3.20
14.13
-0.58
0.90
1.40
1.05
1.36
3.40
46.70
47.00
20.40
12.30
10.90
7.20
2.90
2.40
7.80
6.80
16.10
14.10
365,806
30,763
7.60
8.10
0.30
7
Technical Analysis
The graph below represents Coach’s 12 month moving day average from February 2004
to the present. Also in this graph are the S&P 500 index as well as Bollinger bands. These
bands represent a “safety zone” by which to judge the fluctuations in Coach’s price. However,
as is shown on this graph, Coach has never fluctuated outside of these band over the last three
years and has only fallen below the benchmark of the 12 month moving average one time
(between April of 2006 and October of 2006). This drop in price was in part due to unimpressed
investors. While Coach announced earnings above market expectations, growth investors were
not excited and this caused a small kink in Coach’s general upward trend. This time period is
also the end of their fiscal year and could be the cause of such a long period of lower prices for
Coach.
Graph from reuters.com
8
IV. Firm Financials
Financial Statement Analysis
Exhibit B & C: Income Statement and Balance Sheet
Income Statement:




Their total net sales grew by 23% in 2006 from $1.7 Billion to $2.1 Billion
Their net income grew 37.8% in 2006 due to increased sales and improved margins
Coach has also improved the margin on sales to Japan by hedging currency and
decreasing this currency cost by 9.5%
A portion of their margin improvement is due to the opening of new stores and a wider
sales base by which to spread fixed costs.
Balance Sheet:
 Coach has a substantial amount of cash for growth in the company.
 Net cash for financing activities increased by over $200 million due the repurchase of
stock this past year. This repurchase program expires in June of 2007 (end of fiscal year)
and allows for $500 million of stock to be acquired.
 Their net cash in investing activities is lower than last year by almost $200 Million, but
this is due to their buyout of Sumitomo’s 50% interest of Coach in Japan.
 They also have adequate access to capital through Bank of America. However, as is
visible on their Balance Sheet, Coach carries very little long-term debt.
Debt to Equity
Current Ratio
Book Value/Share
0.01
3.2
4.04
Management Effectiveness
Inventory Turnover
2.4
Financial Condition
Ratio
Return on Equity
Return on Assets
2006
40.8
30.8
2005
34
26.2
9
Recommendation
While there are a few factors in the relative valuation that pointed at Coach as a more
accurately valued stock, overall Coach has a very strong financial position with great
expectations of growth. It has a solid market position with a high quality product that has been
successful in both its US market and Japanese market and has plans for growth in both of these
markets. It is also looking to move into China. Some are concerned that Coach is overextending
themselves and may tarnish the luxury good name of Coach. However, the managers are well
aware of these pitfalls and have taken steps to ensure that there is still high demand for their fullpriced handbags and other high-end products. They also continue to innovate and bring new
products to market to help meet and drive consumer needs. They are also very financially sound
and are able to fund most of this high growth with their strong cash flows.
Coach is a financially sound company that is undervalued and has great room for
growth. Recommend buy.
10
Appendix A:
Warren Buffett Way Owners' Earnings Discount Model
assuming discount rate (k) of
Owner Earnings in 2006:
Net Income
Depreciation
Amortization
Capital Expenditures
Owner Earnings
10.51%
$
494,277,000.00
$
65,115,000.00
$
$
(133,900,000.00)
$
425,492,000.00
2007
Prior Year Owner Earnings
First Stage Growth Rate (add)
$
425,492,000.0
20.0%
Owner Earnings
Discounted Value per annum
$
510,590,400.0
$510,590,400.0
Sum of present value of owner earnings
Residual Value
Owner Earnings in year 10
Second Stage Growth Rate (g) (add)
Owner Earnings in year 11
Capitalization rate (k-g)
Value at end of year 10
Present Value of Residual
Intrinsic Value of Company
Shares outstanding assuming dilution
Intrinsic Value per share
2008
$
510,590,400.0
20.0%
$
612,708,480.0
$554,420,413.8
$7,605,085,056.5
$
$
$
2,634,534,313.8
3.00%
2,713,570,343.3
7.51%
36,116,730,389.37
$13,291,121,956.46
$20,896,207,012.96
367,480,000
$56.86
11
Exhibit B:
12
Exhibit C:
13