Coach As A Resurgent Luxury Giant
The Base Code: Retail
A decade ago, you might have walked by the Coach store, thinking it was only for your mom’s purses. You know, some place you went over the holidays to get a gift for a special lady in your life. But over the last year or so, things have begun to change for one of the original bellwether leather retailer.
They have hired incredibly talented designers from other luxury retailers like Gucci. They’ve updated their styles to match with fashionable dinosaur patches and camo duffels. They’ve even tried to purchase Burberry multiple times.
As the new, fashion-forward designs begin trickling down into the Coach Outlet brand, where you can get a navy blue briefcase for a few hundred bucks, and they get back to their 1940s Manhattan men’s leather roots, expect a resurgence in sales.
II. The Origin Story
Now, in their 75th year of business, Coach began in 1941 with six Manhattanites who had a love for leather. A few years later, a husband and wife team (the Cahn’s) who had experience in running a leather business, joined the company to help it grow.
The turnaround, which started a few years ago, culminated with a new flagship 5th Avenue store in Manhattan, aligning with Coach’s 75th anniversary. The store, next to the recently acquired Stuart Weitzman, focuses on the in store experience and the heritage of the brand.
I’m going to borrow a piece from Wikipedia’s entry because I love how baseball gloves were the inspiration and part of the founding story of the leatherwork found in today’s products.
By 1950, Cahn had taken over the business. During the early years, Cahn noticed the distinctive properties and qualities of the leather used to make baseball gloves. With wear and use, the leather in a glove became softer and suppler. Attempting to mimic this process, Cahn created a way of processing the leather to make it stronger, softer, and more flexible. Since the leather absorbed dye very well, this process also created a richer, deeper color in the leather. Soon after Cahn developed this new process, Lillian Cahn suggested to Miles that the company supplement the factory’s men’s accessories business by adding women’s leather handbags. The “sturdy cowhide bags were an immediate hit.”
As their product line grew and a distribution deal through major department stores, a funny thing happened to the brand that hurt it in the decades to come. In 1985, the owners sold the company to Sarah Lee and it was put under the Hanes division. From a brand perspective for a Luxury accessories business, it was an abysmal business move.
However, the good news is that the business people knew how to go-to-market and began opening boutique stores and offering them in Macys.
Over the last three decades the company has continued to show top-line revenue growth, but today the quality leather company is in a very real turnaround process that is culminating as we speak.
III. The Financials
Coach was in the financial news this week as they have been attempting to takeover Burberry. It would have placed the combined entity as a $20B luxury fashion powerhouse.
Coach has about $1.5B in cash on its balance sheet so any acquisition likely would have been financed with a mix of debt and cash as Burberry’s current market cap is about $6B and Coach only has about $0.6B in long-term debt obligations. Interestingly, they removed their short-term debt obligations at the end of the last quarter. Last year they acquired Stuart Weitzman, which is a designer of women’s luxury footwear and likely serviced some of that debt in the last quarter to prepare for another acquisition.
And we all know where Burberry’s last CEO went after leaving the company. Namely, Apple a tech company getting into luxury. Her replacement was a chap named Christopher Bailey, who was previously the Chief Creative Officer.
If you look at The Base Code’s valuation model, you’ll see that only about 1/3rd of Coach’s value is held in tangible assets. Wall Street expects the rest of Coach’s value to come from future annual growth, about 4% in perpetuity. You can also look at Morningstar’s beautiful new website to get a better sense of Coach’s ($COH) individual financials, metrics, and price ratios.
At $38 per share and an economic profit of +2% (ROIC minus WACC), the question you have to ask yourself is do you believe Coach will grow more than +4% annually forever, especially considering their appetite to acquire other luxury brands like Burberry (attempted) and Stuart Weitzman (closed).
You could be looking at a resurgence not just in design talent and products, but also in its operational management using M&A as the lever to divide and conquer. While not a powerhouse like LVMH, it could be the beginnings of a brand ripe for future growth.
Lets look at the two home pages for Burberry and Coach look like.
To me, the Burberry brand appears more valuable and experiential while the Coach brand is more about selling leather products. You might be surprised to learn that Coach is almost twice as valuable as Burberry.
Expect Coach to continue to find a luxury fashion house that goes well with its leather accessories.
IV. The Only Question That Matters
The biggest test of any public company stock’s future is whether customers continue to buy their products or services. And sometimes more importantly, why they buy a certain product instead of a competitor’s. More precisely, do you buy or use the product of the company you’re about to invest in. So, you may be asking whether we have put our money where our respective mouth is, and purchased Coach products. The answer, unoquivocally, is yes.
Not only have we recently purchased two briefcases and a Manhattan branded coffee table book for ourselves, we’ve also purchased a number of Christmas gifts for friends and family so they can experience the brand as well. From wallets to purses to bags and the like, Coach has become a first-stop destination to see what else they have.
And, of course my favorite aspect of all, the red leather anniversary baseball paper weight that sits on my desk and I stare at every day.
Unless, of course, you buy more Under Armour for baseball than Coach.
V. The Base Code Framework
So should you buy stock in Coach and invest in their long-term future, using our fundamental framework? Lets review what The Base Code Framework has to say about any investment.
BOSRUP: Buy On Sale, Reinvest Under-Performers
It tells you how and when to buy and when to sell. The question, then, is Coach on Sale at a $38 price? I believe if you’re investing for the short-term, which I’ll define as less than 1 year, or for the mid-term, which I’ll define as 1 year to 5 years, then probably not. It’s likely accurately priced. But if you believe where they’re headed: luxury clothing acquisition to complement its accessory-focused business then I believe it’s on sale. When you go to buy a new Burberry coat, for instance, would you want a bag to go with it? My gut says yes you will pick up an accessory.
Since Coach already has a shoe line now, they need a clothing line. Expect in the future (our children’s grown-up purchasing habits), that Coach will have a full line of products in its portfolio. I believe Coach is underpriced looking at the long-term, especially as the economic wealth of the world and their customer base increases.
And if it underperforms compared to another vehicle you can invest in, you can sell and reinvest that capital into that other vehicle.
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from Stories by Sean Everett on Medium http://ift.tt/2hisHp7