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Analyst: Coach turnaround in full swing


Coach ends its fiscal with a set of strong results that signify the turnaround program is making excellent progress. Although sales shrunk in both North America and Europe, this is because this quarter was a week shorter than the same period last year. When this is stripped out, total Coach brand sales rose by 5%, or by 7% on a constant currency basis.

Within North America, the same story holds true. Reported sales were down just over 3%; taking into account the shorter quarter, sales rose by 4%, while direct to consumer sales were up by 5%. These are the strongest revenue figures of the fiscal and were especially positive given Coach was up against a high comparative from the prior year when North American sales rose by 9%.

The North American figures also come against a backdrop in which Coach continues to pull back from department stores, where brand sales were down 40% on a POS basis or 20% in net sales terms. The company is now lapping the anniversary of when it first started to dial back its involvement with department stores, and we are encouraged that the impact has been positive for the brand, helpful to profit, and ultimately beneficial for sales.

The decision to reduce reliance on department stores, while an obvious move, is justified by the increasing gap between their selling environments and those in Coach's own stores. Over the past half year, Coach has put considerable effort into store displays and collections and, in our opinion, these now look very compelling and engaging. Indeed, we believe that window displays and the general selling environment have been elevated a long way from the rather clinical atmosphere of older Coach stores, and are now more inspirational and engaging. In contrast, most department stores continue to go downhill rapidly and are becoming increasingly unsuited to selling premium products.

Thanks to these efforts, in our view, the repositioning of the Coach brand is now almost complete. The label is now back to a position of strength and is held in high regard by consumers. This is a marked turnaround from where it was a couple of years ago when constant discounting and oversaturation had eroded much of the brand's equity and had reduced the premium shoppers were willing to pay. Our data now show that Coach has rebuilt its favorable image with consumers and that it is increasing its market share in the premium handbags and accessories segment of the market. Admittedly, the brand has more work to do to maintain this momentum, but it is clearly on the right track.

In addition to the sales uplifts, Coach's efforts delivered an 86% improvement in net income, even after a higher interest expense. This is a solid gain, but it is clear that on both this and the sales front, future contributions from Coach are likely to be less generous. This is not down to any particular problem with the brand, but merely a reflection that the recovery program will lap tougher comparatives in the year ahead.

Fortunately, the acquisition of Kate Spade gives the company a new growth vector in fiscal 2018. Over the course of the year, this along with the organic growth at existing businesses should add $1.2 billion to the topline. Profits, at least at operating level, will be aided by the $30-35 million of synergy savings from the integration. However, it is also clear that there will be some short-term pressure as Coach pulls Kate Spade back from wholesale and its exposure to unfavorable channels, as well as reduces the number of flash sales with which the brand is involved.

In essence, Coach is hoping to rebuild the Kate Spade brand in the way it has done with its own label. If it succeeds, and we believe it will, it will emerge as a significant luxury player and one that, ultimately, will probably be keen to make further acquisitions.

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