download - French Chamber of Commerce and Industry in Hong Kong

Consumer Brands & Retail
Global luxury goods – Equity
March 2013
abc
to reinvent the brand and question itself, there are
undeniable risks on the journey. First, any brand
leaving its core competency may find it also leaves
its comfort zone, but it will also be seen as a sign of
maturity in the US. A bit like Louis Vuitton went
into watches and jewellery, shoes, ready-to-wear and
now stationery, the move from Coach to be more
encompassing (footwear push, apparel, etc) signals a
few limits in their core category (women's handbags)
in their core market (the US). The other issue with
diversification is the structural margin dilution of the
new product categories, which puts a question mark
on the level of margin that the company can hope for
in the future.
We do not doubt that comps should be able to
rebound in the next few quarters from the -2% US
comp. We don't think that's the most relevant
question though as the brand enters a new phase of
its development. The market needs to accept Coach
has moved from a category killer to a very large,
dominant share player that can only stabilise if not
lose share in its core market.
Does that make it non-investable? Not in our view.
When looking at valuation, cash generation and
ROIC metrics (still above 100%), there will be a
price to pay for everything and the market de-rating
of the stock has probably already taken into account
the change in business model and prospects.
For H2 ending June 2013, Coach now expects to
grow sales mid-single digits (with flat comps), (ii)
GM to increase modestly. For FY June 2013, Coach
still expects a c150bp SG&A increase due to the
integration of the above-mentioned Asian
businesses, and a c31% EBIT margin. In other
words, the EBIT margin indication is unchanged but
the sales indication is lower than before the Q2
results publication.
Earnings, valuation and risks
Coach published its Q2 results on 23 January and
should be publishing Q3 results on 23 April.
Although Coach has guided towards flat North
American comps in H2 ending June 2013e, we
believe it makes sense to forecast a 3% decline in Q3
followed by a 3% increase in Q4 due to the different
comparison bases. Indeed, last year comps rose 7%
in Q3 and 2% in Q4. For both FY13/14 and
FY14/15, we forecast 2.5% comps.
In terms of EBIT margin, we forecast 30.6% in
FY12/13, then 31.2% in FY13/14 and 31.7% in
FY14/15. A greater proportion of “lifestyle
categories” vs the more profitable handbags and
accessories should weigh. However, the negative
150bp impact from the integration of former partners
in Asia which affects FY12/13 should progressively
wane.
Our DCF-based target price (USD71) is unchanged
(no change in estimates either). The assumptions
used to generate our DCF-derived target price are
detailed on page 67.
Under our research model, for US stocks with a
volatility indicator, the Neutral band is 10 percentage
points above and below the hurdle rate of 7.0%. Our
target price implies a 42.8% potential return, which
is above the Neutral band; therefore we reiterate our
Overweight (V) rating. Potential return equals the
percentage difference between the current share
price and the target price, including the forecast
dividend yield when indicated.
The stock is trading at a calendar PE of 12.9x for
2013e, a 30% discount to European luxury stocks.
Downside risks in the long term include the brand’s
different positioning in its two channels (full-price
retail and factory outlets), which could pose a threat
to its image, a lack of success in diversifying out of
the core handbags and accessories product and a lack
of traction in the European market.
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