Coach’s Valuations are Costly Compared to Performance
Coach's 3Q15 Earnings Beat Estimates, But Stock Plunges Anyway (Part 4 of 5)
Analyzing shareholder returns for Coach
Coach’s (COH) stock has returned ~6.4% year-to-date. Coach’s returns have been positive due to the brand buzz surrounding its new design team, headed by Stuart Vevers, and its transformation plan. Coach’s stock price has also benefited from th e acquisition of premium footwear brand Stuart Weitzman, along with the deal with Interparfum of France.
However, returns for Coach have been in negative territory during the last one-year and three-year periods, underperforming most peers. Please refer to the chart in Part 5 for this information.
In comparison, peers Ralph Lauren (RL), Michael Kors (KORS), and Kate Spade (KATE) have returned -26.9%, -16.5%, and 5.3%, respectively. Year-to-date returns for the SPDR S&P Retail ETF (XRT) and the Consumer Discretionary SPDR Fund (XLY) have come in at 4.0% and 6.0%, respectively.
Store comps for Ralph Lauren declined in the last quarter. While comps for Michael Kors have been positive, the pace of that increase has been falling due to the tough discounting environment. Same-store sales for Kate Spade grew 28% in the quarter ending January 3, 2015.
European luxury thrives
In contrast, European luxury goods firms have generated positive returns. LVMH Louis Vuitton Moët Hennessy (LVMUY) (MC.PA), the world’s largest luxury goods firm, has returned 13.6% this year, while Burberry (BURBY) (BRBY.L) has returned 7.6%. Christian Dior (CHDRY-PK) (CDI.PA) has returned 25.3% .
European firms have benefited from the weak euro and lower energy prices. Plus , the retail environment in the Eurozone is improved due to the Eurozone stimulus.
Markets unconvinced
Despite the positive returns this year, COH dropped by over 6% to $39.65 on the release of its 3Q15 earnings on April 28. Valuations for Coach dipped by 6% following the release. However, valuations are up by 7.5% since the start of 2015 and by 1.3% since February 4, when the company released its 2Q15 earnings. To an extent, th e acquisition of premium footwear brand Stuart Weitzman has diversified the company’s exposure away from the competitive handbags category.
At a forward price-earnings multiple of 20.8x, Coach is still among the costliest stocks in the sector. KORS and RL are trading at 13.6x and 18.7x forward earnings, respectively. The consumer discretionary sector is trading at 20.1x forward earnings, while the S&P Global Luxury Index is trading at 19.0x forward earnings.
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