Coach's Handbags Division Is Stuffed With Value

For Coach Inc. (COH), coach handbags are its most important business, contributing close to 70% to its

value. The retailer reaches its customers through company-operated retail & industrial unit, wholesale

distributors, self-supporting stores and the internet. Coach typically releases three to four collections

per quarter and four to seven styles per collection.

Coach’s handbags come an “inexpensive luxury” price point as they are appreciably cheaper than other

luxury brands such as Louis Vuitton, Gucci and Prada but still have strong brand respect. Moreover, the

retailer is approachable to changing fashion trends, provides a rich in store experience, good customer

service and lifetime warranties. This makes Coach one of the strongest products in the handbags

market. Despite the handbags large size relative to Coach’s other businesses, this division has been

growing faster than other segments such as belts & wallets for the past 4 years. We believe that

handbags business will play a crucial role in driving Coach to $58.

What Gives Coach’s Handbags An Advantage?

Branded handbags are often professed as a status symbol and a lifestyle choice. Coach offers

distinguishing, well made and relevant products, and the retailer utilizes customer feedback to remain

bendy towards fast-changing customer needs in the dynamic luxury goods market. Moreover, it offers a

lifetime warranty on its handbags, which its customers appreciate.

The slow economic growth in the U.S. has predisposed buyers to become more cognizant about their

spending. In such an environment, Coach’s ability to provide luxury and quality handbags at lower prices

gives it a aggressive advantage over its pricier peers. While the average price of a handbag from Coach is

around $425, shoppers pay around $3,000 for a typical Louis Vuitton handbag and $2,000 for a Gucci or

a Prada handbag. Additionally, Coach has accelerated its factory stores expansion where the customers

can buy handbags at lower prices than its full-priced flagship stores.

Wholesale Channel Is Weak But Coach Should Not Be Concerned

In the wholesale section, Coach sells its products through other department stores. As a result, the

retailer runs the risk of increasing competition from retailers such as Macy’s (M) (including

Bloomingdale’s), Fashionlanes’s (FL), Nordstrom (JWS), Sacks (SKS) (including Carson’s) and Lord &

Taylor. These retailers offer a wide collection of handbags from a number of different designers. This has

weighed on Coach’s Wholesale Handbags revenues in the recent past. However, this channel accounts

for only 25% of its handbags revenues and thus less than 15% of its predictable value. We believe that

with faster expansion of retail stores, increasing competition in wholesale channel will not be a concern

for Coach.

International Growth Opportunity

Coach recorded a revenue growth of 35% in China in Q1 fiscal 2013. China, with its huge population,

booming middle class and rising disposable income, is becoming the focal point for apparel and

accessories retailers. Coach is aiming for $550 million in annual revenues from this region by fiscal 2014

as compared to $300 million in fiscal 2012. To attain this, the retailer plans to open about 30 stores

annually in the region.

Coach also entered markets of Brazil, Vietnam & Kuwait via its wholesale channel during fiscal 2012.

Other up-and-coming markets, including Brazil, South-East Asia and Middle-East will experience a 35-

40% growth in luxury goods spending in the next five years as personal wealth, spending capacity and

fashion consciousness increases in these markets.

Key Risks To Consider

Although Coach seems to be on the right track, its growth can be caught up by weakness in the Chinese

economy. In the third quarter, the GDP growth rate in the region fell to 8.4%, its lowest level in the last

three years. If China’s economy were to slow further, the retailer might be more tentative in

aggressively opening new stores.

The competition in the wholesale section could further intensify with increasing saturation of private

label brands at general stores. Although competition also exists in the retail section, we believe Coach’s

brands and prices are safe in the retail channel vis-a-vis the wholesale one.

To determine sensitivity, if the above mentioned factors drag down daily coach handbags revenue per

store from the estimated $14,100 to $15,000 towards the end of Travis forecast period, there could be

downside of the order of 10%-15%.