Coach is on the right path

“The hardest has already been done». «The hard part is finally behind» … In recent days we have read several sentences referred to US handbag maker Coach. The company confirmed that its sales for the first fiscal quarter increased 0.7% to $1.04 billion, while earnings per share were 45 cents, exactly what the market expected. Geographically, the strong increase came from UK (thanks to the collapse of the pound after Brexit) and North America, where sales rose 2%, ending the bloodletting that has been occurring in recent years.

After these results, Coach reiterated its sales forecast for the full year, announced in August, which means that its net profit will grow at double digits this year (over 10%), while sales will grow at a rate of one digit. This has been a relative surprise for a company that had been characterized by worsening their own forecasts again and again in recent years.

The restructuring plan has been based on a strict cost control, ending the policy of discounts on their products, the introduction of new models (like Drifter and Mercer bag models), the renewal of its shops and the withdrawal of merchandise from 250 department stores, where the drop of customer traffic has caused a wave of discounts to sell the growing stock. In fact, it has been able to reduce its inventories by 5% in the quarter.

Moreover, it has attracted much attention Coach’s comments about potential corporate operations. A few weeks ago it was much speculation with a possible acquisition of Burberry. Coach has denied planning an imminent acquisition, but it has left the door open by stating that it has the flexibility to do so if it is interesting for its shareholders.

Coach shares rises 12% so far this year and almost 20% in the last twelve months, although they are trading at just half of its record highs in 2012. Its current PER of 18 times, is under the industry average. The average recommendation of analysts after the results is Outperform with a target price of $44 per share (with an upside potential of 20%).

Disclosure: The Luxonomist is not responsible for the views expressed in the article. The text has been written freely expressing their own ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.