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Scott Aster

Finance 573: Coach Inc Sell Report


3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear

Coach Company Analysis


Recommendation: Sell Coach
The current recessionary environment has had a strong negative impact on individual
income levels, consumer spending and consumer credit availability. As a producer of
high priced luxury goods Coach stands to suffer from the state of the economy as
conspicuous consumption is frowned upon and consumer frugality is in fashion. These
are factors that significantly impact Coachs financial outlook as the company has
experienced declines in both same store sales as well as earnings from fiscal 2008 to
fiscal 2009. Coachs gross margins are also shrinking as the company has had to
increasingly rely upon its factory outlet stores to sell its products1. This also presents the
problem of brand dilution.
From a valuation perspective Coachs P/E ratio, currently at 18.23, is well above the
apparel industry average of 3.26, which suggests that from a relative valuation
perspective the company may be overpriced2. Furthermore, the DCF analysis indicates
an intrinsic value of approximately $35.00 while the current share price is $38.27
(3/11/10 close). Based on this quantitative data the stock is currently overpriced and has
very little upward potential within our investment horizon. The stocks price has
increased over 200% in the past year and has been fluctuating between $34.00 and $37.00
since October (please see Appendix 1). The alpha from this stock was fully extracted in
2009 and the Coach holdings have run their course. The intent of this report is to illustrate
that based on a combination of qualitative and quantitative factors this stock is currently
overvalued and it is preferable to sell Coach and seek another stock to replace its value.
Company Overview
Coach Inc. specializes in the production of premium lifestyle accessories and is one of
the most recognizable luxury brands in both the United States and Japan. The company
provides innovative and fashionable products at relatively attractive prices. Coachs
product line consists of handbags (64%), accessories (28%) and other (8%) products
including footwear, jewelry, brief cases, etc (please see Appendix 2). Major elements of
differentiation include: its distinctive brand name, market leadership position, loyal
customer base, multi-channel international distribution and its consumer-centric design
operations3.
The Coach brand name is associated with quality and value due to the companys
expertise in design and emphasis on providing attractive prices to customers. Coach is
the market share leader for handbags and accessories in the U.S. and Japanese markets
(please see Appendix 3) and is targeting emerging markets such as China for further
growth opportunities. The company has cultivated an emotional attachment between its
1

Coach Inc, 2009 Annual Report: 22.


Reuters/COH. http://www.reuters.com/finance/stocks/overview?symbol=COH.N
3
Coach Inc, 2009 Annual Report: 1.
2

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
customers and its brand through continually producing superior value and being abreast
of market trends. Coach products are sold through both its own retail outlets as well as
other established retailers worldwide and through its online catalog. It is a consumer
centric business as the company conducts rigorous consumer research in gauging
changing trends and consumer interests. The companys design and merchandising teams
are well respected for collaborating to forecast fashion trends and produce quality
products that are appropriate for each season4.
Supply Chain
Production begins with Coachs New York-based design and merchandising teams.
These two teams work in tandem to produce items that perpetuate the Coach brand and
its image of quality. The design team conceptualizes Coach products and has access to
the companys archives of 70 years worth of design concepts. These archives are a
valuable resource for new design concepts. The designers are supported by a
merchandising team that excels in consumer research. Merchandisers are responsible for
analyzing products and adding as well as deleting lines in order to achieve profitable
sales across all channels. The product category teams, which consist of both designers
and merchandisers, help Coach execute design concepts that are consistent with the
companys brand image and strategic direction.
While Coach controls the design of its products the manufacturing is done by
independent contractors. Coach ensures quality raw materials go into its products by
maintaining sourcing and product development offices in Hong Kong, China, South
Korea and India that work closely with the independent manufacturers. The rigorous
selection of raw materials has been key to maintaining Coachs brand image of superior
quality. Coach factories are in low cost markets such as China, Thailand, Vietnam,
Turkey, Ecuador and others. The companys commitment to maintaining material quality
combined with the low cost manufacturing process has been an integral aspect of the
companys financial success.
Coach operates an 850,000 square foot distribution center in Jacksonville, Florida. This
automatic facility uses a bar code scanning warehouse management system. Coachs
employees use scanners to read product bar codes which allows for more accurate pack
orders, track shipments, inventory management and overall better customer service.
Products are then delivered from this warehouse to Coach retailers and wholesale
customers5.

Industry Overview
4
5

Wikinvest/COH. http://www.wikinvest.com/wiki/Coh
Coach Inc, 2009 Annual Report: 7-8.

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
Coach is considered to be in the apparel and footwear industry. As a producer of luxury
accessories, Coach occupies a smaller niche portion of this market enabling greater
flexibility in product pricing. Coach has established a reputation for quality and value as
well as a brand name that enables it to extract premiums within its industry. Though the S
& P 500 peer composite lists companies such as Tiffanys Inc, Kenneth Cole Productions
and William Sonoma, Coachs most significant competition does not take place within
the United States6. The handbag market is primarily dominated by European companies
such as Gucci, Fendi, Prada, Louis Vitton and others. These companies are at the highest
price point in the accessories market with handbag prices in excess of $1,000. The
primary demographic for the elite handbag market is the affluent and extreme brand
oriented consumer. Coachs handbags are described as affordable luxury items as the
company competes at a lower price point of $300-$8007. Coach has a multi-tiered
pricing strategy as it utilizes its own retail as well as department store sales to capture
higher price points while selling its older merchandise at factory outlet stores to capture
the lower end of its market. The demographic for Coachs products is primarily the
middle to upper middle class.
Industry Trends
S & P Net Advantage predicted that apparel industry sales would experience declines in
the range of 3%-15% in 2009. However, apparel sales were actually slightly improved in
2009. According to the Census Bureau sales in the apparel industry, down 7.7% from 07
to 08, were up 2.2% from 08 to 09 (please see Appendix 4). However, the major trend
occurring in the apparel industry is referred to as the New Normal which entails lower
consumer spending and long term downward revisions in demand for apparel products in
response to the current recessionary environment (please see Appendix 5). This New
Normal concept involves a more fiscally responsible consumer weary of credit card debt
and overspending8. A survey conducted by Nielson Global Online indicated that in this
time of rising living costs the first items to be excluded from consumers budgets were
new clothing purchases (please see Appendix 6).
None of this bodes particularly well for Coach as a producer of luxury accessory
products. Coachs products are highly substitutable by lower priced generic handbags.
However, the factory outlet stores do alleviate some of this concern as they provide
Coach access to a more price sensitive consumer market. In the current economic
climate Coachs sales have come increasingly from the factory stores, which mark
products down 10-50%9. While this is providing the company with greater short term
sales it is resulting in lower gross margins and could cause long term harm to the
companys brand image. Coach must try to avoid becoming too accessible as part of the
allure of its products is their luxurious image. If Coach products become too mainstream
6

Edgaronline.com/COH/peer composite. http://yahoo.brand.edgar-online.com/EFX_dll/EDGARpro.dll?


FetchFilingHtmlSection1?SectionID=6116953-87124-91920&SessionID=roI6WqQv68Cghw7
7
Coach homepage. http://www.coach.com/online/handbags/Home-10551-10051#
8
http://www.netadvantage.standardandpoors.com/apparel
9
Coach Inc, 2009 Annual Report: 4.

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
there is the potential that this luxurious image may be lost and the company will struggle
to extract greater premiums as the economy recovers.
Multi-Tiered Pricing Strategy
Coachs products are considered luxury items but are more accessible than most luxury
handbags due to the variety of price points that the company offers. The most up to date
seasonal merchandise is sold thru its retail stores. These are generally in upscale
downtown areas with a target market of the upper middle class to the affluent. The retail
prices are generally between $300 and $800. There are no discounts in Coachs high end
retail stores. Coach also distributes its products to high end department stores such as
Macys and Nordstrom. These department stores are prohibited from discounting
Coachs products. Factory outlet store sales have become increasingly significant to
Coachs financial success in the 4 years. The company sells its unsold merchandise
through these outlet stores. Products sold through the outlet stores are generally a year
old or older and are marked down 10%-50%. Coach also uses the internet as well as a
company catalogue to sell its merchandise. Currently approximately 84% of Coachs
sales are direct-to-consumer, which includes the retail stores, factory outlets, the website
and the catalogue. Approximately 16% of Coach sales take place thru indirect channels,
which consists of the high end department stores10.
As mentioned before, Coachs increasing reliance on factory stores for sales are cause for
concern as the brands luxury image may become diluted as the economy recovers.
According to Coachs earnings calls the companys factory store sales have been so
successful that it is actually beginning to produce made-for-factory products11. Women
wear luxury handbags as differentiating status symbols. When a luxury item becomes too
accessible to all consumers there is no allure for the career women with money to
purchase such an item as they do not want to wear what teenagers wear. This results in
downward revisions in consumers opinions and price expectations of the brand and as a
result hurts gross margins. This is problematic as the company becomes a low margin
producer it will be competing against a greater amount of cheaper generic handbags.
Efforts should be taken to protect Coachs brand identity and ensure that the companys
price points and brand image remain above those of generics avoiding the temptation to
lower prices in difficult economic times.

Geographic Expansion
10

Coach Inc, 2009 Annual Report: 64.

11

Coach, Inc. F2Q10 (Qtr End 12/26/09) Earnings Call Transcript.


http://seekingalpha.com/article/183440-coach-inc-f2q10-qtr-end-12-26-09-earnings-call-transcript?
source=bnet

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
Coach is number one in the U.S. and number two in Japan in terms of luxury handbag
market share. The U.S. represents 72% of Coach sales while Japan represents 25%.
Coach has aggressive expansion plans for these two markets. Coach currently operates
330 retail stores in North America and believes that the North American market can
support approximately 500 retail stores. Similarly Coach currently operates 155 retail
stores in Japan and believes that the Japanese market can support 180 retail stores. Coach
intends to continue on with its expansionary agenda despite the economy as the company
is planning to build 20 new North American stores and 10 new Japanese stores in 201012.
However, Coach has little to no market share in Europe as several of the aforementioned
elite handbag brands dominate the European landscape. Due to the luxurious nature of
the product there is very little potential for Coach to expand in developing nations as the
company has almost no presence in South America, Africa or Southeast Asia. However,
Coach is planning for aggressive expansion into the Chinese market. The Chinese market
represents 1% of Coach sales with the company currently owning 28 stores there and
planning to open 15 new locations in 2010. However, the struggle for Chinese market
share will be extremely competitive as the European companies will also be entering this
market. Coach is banking on the assumption that the massive increase in Chinese wealth
will be great enough to support numerous luxury handbag producers entering the Chinese
market.
Coachs plans for geographic expansion during this recessionary environment are cause
for a bit of concern. The companys 1.6% increase in sales from 08-09 were driven
purely by expansion while same-store sales declined 6.8%, gross margins dropped 4%,
net margins dropped 5% and earnings dropped 20%13. Aggressive expansion as the
comparable earnings of the company decline is a very risky strategy. Coach management
appears to have a rosy outlook regarding its positioning in the economy beyond this
current recession. Despite its expansionary plans there are not many markets for Coach
to expand in outside of the North America, Japan and China. The luxurious and niche
nature of its product dont necessarily attract consumers in lower income economies.
This geographic concentration may limit Coachs growth opportunities in the long term
and potentially prohibit upward movements in its stock.
Financial Analysis
Coachs income statement for fiscal 2009, which includes June 30, 2008 thru June 30
2009, reflects the overall trends taking place in the consumer discretionary sector. The
slight sales increase of 1.6% is largely due to store expansion as 33 North American
stores were added (an 11% increase), 9 new factory outlet stores (a 9% increase), 6 new
Japanese stores (a 4% increase) and 4 new China stores (a 17% increase). This increase
in sales coincided with a severe 20% decrease in net income14. This conflicting increase
in sales with such a large drop in earnings reflects a significant decrease in net margins.
In the notes to Coachs financial statements the company attributes this to an increasing
reliance on its factory outlet stores for sales. The company also recognizes the factory
12

Coach Inc, 2009 Annual Report: 18.


Coach Inc, 2009 Annual Report: 20.
14
Coach Inc, 2009 Annual Report: 3.
13

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
stores increasing impact on its sales in its recent earnings calls. However, there was no
breakdown of sales by factory stores versus other channels in its 10k or anywhere else so
I was unable to determine the exact percentage of this increasing reliance on factory
stores. Prior to 2009 Coachs gross margins were generally around 76%-77% while its
net margins were usually between 23% and 24%. However, in 2009 the gross margins
dropped to 71% while the net margins slipped to 19% (please see Appendix 7). The 10Q
for Coachs 2009 holiday season, which is actually Q2 2010 for Coach, reflected slightly
better results than the previous year that was reflected in the companys 2009 income
statement. Both sales (11%) and net income (11%) increased from the holiday season of
09 versus 08 (please Appendix 8). The improved holiday sales resulted in trailing
twelve month sales that were 3.5% better than the 2009 income statement. However,
neither the gross nor net margins have improved and are both still at 71% and 19%.
Coachs balance sheet is very strong. The company has $1.1 billion in cash, which
represents more than a third of its total assets and almost doubles the companys current
liability total. This strong working capital position is further aided by the fact that the
companys current assets are three-fold greater than its current liabilities. This is
imperative as maintaining a strong working capital is key in the apparel retail industry.
Even more impressive is the companys capital structure. Coach has only $25 million in
debt, making it 98% reliant on equity versus 2% on debt for its financing15. This strong
cash position with its little to no debt gives Coach a lot financial flexibility in these
difficult economic times. Coach has decided to utilize this financial flexibility by
expanding into new markets and fortifying old ones. This is illustrated by the increase in
capital expenditures indicated in the DCF analysis as the companys TTM capital
expenditures have increased to over $500 million, which over twice as much as the prior
year. While the company is financially healthy enough to undergo such expansion
whether this is the prudent use of funds in this recessionary environment is yet to be seen.
I am skeptical as to whether the demand for this product in this difficult economy will
support such expansion.
Coach also has a very strong cash flow statement. Cash inflows from operations were
$800,000 which indicates that the company is doing a solid job of generating cash from
its operations. The companys primary outflows are capital expenditures and stock
repurchases ($450,000)16. These outflows indicate that the company is very bullish on its
future prospects and is willing to spend large amounts on both expanding along with
providing shareholders returns on their investments. This stock payback will increase
returns on equity as the equity decreases.
In conclusion, Coachs income statement reflects lower margins and decreasing same
store sales while the increase in overall sales is supported by expansion. Coachs
demographic has drifted toward a more frugal consumer willing to purchase last years
merchandise at a lower price point. This is reflected in lower gross and net margins.
Meanwhile, the balance sheet is trending positive as the company has little to no debt and
is able to fund its expansion with its giant cash account. The company is also using its
15
16

Coach Inc, 2009 Annual Report: 38.


Coach Inc, 2009 Annual Report: 41-42.

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
cash to buy back equity, returning value to its investors and lowering its equity base.
Outside of the current recessionary environment impact on Coachs sales it appears that
company is financially healthy.
SWOT Analysis
Strengths

Core Competence in design and merchandising: Coach has over 70 years worth
of design archives to assist it in producing products for each season. This long
history in the handbag/accessory market gives it a competitive advantage as it has
a vast amount of previous designs to build off of when producing products for
each season. This long company history has also given the merchandising team
strong experience in developing consumer research capabilities and given it a
keen sense of what its target demographic wants.

Multi-tiered pricing strategy: Coachs product is classified as a luxury item but


is accessible to a larger market due to the variety of price points that the company
offers. These include high end retail and department stores as well as the cheaper
factory outlets. Analysts have noted that this tiered pricing strategy is not
common in the luxury goods industry, which on average has higher entry-level
price points than that of Coach. This pricing structure allows the company to
attract affluent consumers while also providing lower-income consumers access to
a brand they would not be able to afford otherwise. Throughout the recession this
has kept overall sales numbers stable though it has caused margins to dip.

Established brand name: Brand names are what allow companies in the apparel
industry to de-commoditize clothing/accessory products and extract premiums
from the market. Throughout its history Coach has developed a reputation for
providing its customers both quality and value. This has helped the company
establish a following of consumers that buy Coach products exclusively.

Lots of cash and almost no debt: Coach has a strong balance sheet which allows
it to finance its operations internally. This is a huge boon to a luxury brand
business in a recessionary economy and provides it with a strong financial
competitive advantage as luxury competitors may not have access to such
financing. This cash advantage allows Coach to expand without the need to rely
on currently expensive (or unavailable) leverage.

Weaknesses

Geographic concentration: Coach currently relies on just the U.S. and Japan for
97% of its sales and it may be difficult to expand this limited geographic reach.
Coach is very limited in its expansion possibilities. Europe is entirely dominated
by the elite European luxury brands while there is not yet a market for luxury
items in many emerging markets. This leaves Coach with expansion potential in

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
its existing markets: the U.S. and Japan. However, these markets are beginning to
saturate and it may be risky to further expand in these markets in this economic
environment. China is the major new market that Coach intends to expand in and
this will be an extremely competitive expansion as the elite European brands will
also enter the Chinese market.

Declining margins: Coach is experiencing declining margins on its products.


This is primarily due to the economys impact on luxury brand purchases which
has caused sales at its factory stores to increase as more consumers seek bargains.
Coach has been relying on sales at its lower price points and though net sales have
remained steady the margins have shrunk from 36.1% in fiscal year 2008 to
30.1% in fiscal year 2009. This is a troubling trend for a luxury company that
relies on its brand to produce superior margins on its sales.

Opportunities

Expansion in the U.S., Japan and China: As previously mentioned Coachs sales
take place predominantly in the U.S. and Japan. The companys CEO feels that,
while the company has 330 stores in North America, that this market can support
up to 500 stores. And while there are currently 155 Coach locations in Japan
management believes that the Japanese market can support a total of 180 stores.
With the rise of Chinas middle and affluent classes the Chinese market has
become increasingly important for luxury brands such as Coach. Over the next 5
years Coach plans to open a total of 50 retail locations in China and increase its
market share from 3 to 10%.

Threats

Luxury brand susceptible to recessionary environment: Retailers have had to


weather a difficult economic environment since 2008. Consumers are unsure of
their financial security as companies have resorted to laying off workers in an
effort to cut costs. In an uncertain economic environment consumers seek to cut
costs and save as much money as they can, and clothing is usually the first to go.
Luxury clothing and accessory items, in particular, have been and will be affected
the most in this New Normal economic environment.

Brand dilution: As a luxury retailer, Coach heavily relies on an image of


exclusivity to fuel interest and sales of its products. A luxury company can lose its
allure if the brand becomes too popular or too accessible. Coach risks losing this
luxury status by selling through its factory outlet stores. This cheaper sales
channel makes Coachs product available to a different target demographic than
Coachs traditional luxury consumers. This accessibility to a lower end market
may put off Coachs high end consumers who value the exclusivity of the brand.
In the long run this brand dilution may negatively impact both Coachs margins
and its brand image.

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
Performance Analysis
Below are some performance indicators that illustrate Coachs superior financial
performance relative to a couple stronger competitors as well as to its industry and sector
averages17:
Coach
Polo Ralph Lauren
Tiffany & Co
Industry
Sector

ROE
41.30%
16.39%
16.59%
14.43%
8.83%

ROA
30.08%
9.99%
10.14%
8.32%
3.24%

Net Profit Margin


22.48%
8.12%
11.05%
5.10%
3.32%

Polo Ralph Lauren and Tiffany & Co. are some of Coachs top domestic competitors.
These three are the only companies to have positive earnings and hence report P/E ratios
within Coachs S & P peer composite of six companies which also included Kenneth
Cole Productions, Ann Taylor Stores, William Sonoma and Talbots. Coach is clearly a
top performer within its industry as the company has vastly outperformed the industry
averages in ROE, ROA as well Net Profit. It has outperformed the sector averages even
more significantly and its stock has been a top performer in the apparel industry over the
last 5-6 years (please see Appendix 7). Furthermore the company has exceeded some of
its better performing peers in these financial metrics. The equity buy backs are clearly
aiding in the return on equity metric and though the margins are decreasing they are still
above the vast majority of companies within its industry. However, it would be more
informative to look at some of the companys more comparable European competitors.
However, this data are currently unavailable.
Relative Valuation Analysis
Below are some relative valuation figures relating Coach, some of its domestic
competitors as well the industry and sector averages18.
Coach
Polo Ralph Lauren
Tiffany & Co.
Industry
Sector

EPS
2.00
4.04
1.27
N/A
N/A

P/E
18.60
19.84
34.34
3.57
35.10

P/Sales
3.49
1.62
2.12
0.24
0.20

In looking at the above data it appears that Coachs P/E ratio is well below the consumer
discretionary sector average, which is most likely due to a dearth in earnings in this sector
from the prior year. However, Coachs P/E ratio is well above industry average of \3.57.
This may indicate that the company is overvalued. Coachs P/E ratio is in line with Polo
17
18

www.reuters.com
www.reuters.com

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
Ralph Laurens and well under Tiffanys. While Coachs high P/E ratio may reflect an
overvalued stock the Discounted Cash Flow analysis will be the primary indicator in that
regard.
DCF Analysis
Provided are the inputs for my WACC calculation:
Risk Free 10 Year Bond
Risk Premium
Beta
Cost of Equity
Equity Weight
Debt Rate
After Tax Cost of Debt
Debt Weight
WACC

4.40%
5.17%
1.30
11.10%
98.00%
4.68%
3.00%
2.00%
10.96%

Coachs beta is listed on multiple websites as being in the range of 1.73. Initially this
number was used in the WACC calculation with the cost of capital being over 13%.
However, upon further consideration this beta was deemed too high and that a number
closer to the industry average was more appropriate. However, according to Reuters the
apparel industry average beta is 0.84, which is far too low for a luxury brand producing a
highly discretionary product. Using the industry average would have put Coachs beta
below that of value retailer Targets (1.06) which does not accurately reflect the nature of
Coachs risk in this recessionary economy. The mean of the industry average (0.84) and
the individual beta (1.73) was taken and used in the DCF. This mean number was
approximately 1.30. This number seems appropriate for a company producing high end
products. As modified the results are indicated in the table below:
Current Price (3/12 close)
Cost of Capital
Terminal Growth Rate
Debt
DCF
Shares Outstanding
Value per Share

$38.27
FCFF
10.96%
3.5%
$25.076 M
$11.128 B
$317.8 M
$35.05

FCFE
11.10%
3.5%
$11.283 B
$317.8 M
$35.54

Some of the important assumptions that I made were revenue growth of 3% in the first
couple of years that gradually made its way to 5% at year 5 of my valuation. This is
primarily because I see the companys growth at least slightly exceeding inflation over
the next couple years and then gradually increasing as the economy gets stronger. The
10

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
companys expansionary goals almost ensure that there will be at least 3%-5% revenue
growth over the next 5 years. I also have SG&A and COGS remaining stable as a
percentage of revenue over the first couple of years and then gradually decreasing as a
percentage of sales as the economy improves. Even with these somewhat optimistic
forecasts the companys stock appears to be a bit overvalued. The intrinsic value under
the Free Cash Flow to the Firm model was $35.05 while the value was $35.51 under the
Free Cash Flow to Equity model. This approximate valuation of $35.00 is a bit below the
current share price of $38.27. This appears to be an appropriate beta number as Coachs
stock had been hovering between $34.00 and $37.00 for several months. However, if
Coachs individual beta were to be used the intrinsic value of Coach stock would be
significantly lower. Using Coachs beta of 1.73, the intrinsic value of Coach stock was
calculated at approximately $28.00 using both FCFE and FCFF. This is over $10.00
below the current share price. Regardless of the beta number used this stock appears to
be overvalued. This quantitative indication of value leads me to conclude that Coachs
stock price exceeds its intrinsic value and that it is currently time to sell this stock and
seek alpha elsewhere.
Conclusion
The overriding factors in the decision to sell Coach stock are its high price relative to its
intrinsic value and the highly unfavorable current market conditions for luxury brands. In
looking at the SWOT analysis the weaknesses and threats outweigh the strengths and
opportunities with regard to the stock sell decision. The SWOT illustrated the solid
financial position as well as the highly regarded operating history of this company.
Coach has solid financials as of the 4th quarter of 2009 as its total debt/equity ratio is
0.013 and it has $1.1 billion in cash. The company is one of few luxury brands with
increasing sales throughout this recession. The multi-tiered pricing structure appears to be
keeping the company on an upward trend with regard to net sales numbers. However, the
New Normal environment presents some significant challenges for Coach. The company
is expanding in a time of economic uncertainty and same store sales, despite an increase
in the 4th quarter of 2009, have otherwise declined since the 3rd quarter of 2008. Even
more problematic are the companys declining margins. The increasing reliance on
factory store sales is a result of frugality pervading the economy and careful consumers
purchasing fewer luxury items. If increasing sales through factory stores becomes a long
term strategy rather than a temporary necessity then Coachs brand image will be
tarnished and its ability to generate superior margins, as it has done in the past, will be
diminished. The other major factor in the decision to sell Coach is its stock price being
greater than its intrinsic value. According to the DCF analysis the value is at
approximately $35.00 relative to a market price of $38.27 as of Friday March 12th. This
is a significant discrepancy and indicates that Coach shares are overvalued. Coach stock
thrived last year and exceeded its target value in October of 2009 after a 200% increase.
It has wavered since then and it appears that there is not a lot of potential upward
movement. The portfolio will benefit from selling Coach stock and purchasing shares in
a company better positioned to thrive in this recessionary economy and that is currently
selling below its intrinsic value.

11

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear

Appendices
Appendix 1: Coach stock over last 2 years

12

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear

Appendix 2
Coach 2009 10k, p. 2
Appendix 3

Coach 2009 10k, p. 65

Appendix 4:
Year over year
consumer
spending on
apparel in last
three holiday
seasons
4Q06/4Q07
2.2%

4Q07/4Q08
-7.7%

4Q08/4Q09
1.8%

13

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear
U.S. Census Bureau: Consumer Spending

Appendix 5

Appendix 6

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Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear

Appendix 7: Past 4 years of Sales and Net Income illustrate declining margins (in
billions)

Coach 2009 10k, p. 40

Appendix 8: Past 4 holiday seasons of sales and net income illustrate declining
margins (in billions)

15

Scott Aster
Finance 573: Coach Inc Sell Report
3/1/2010
Sector: Consumer Discretionary
Industry: Apparel & Footwear

10Q Data per SEC.gov

Appendix 9: Coach stocks performance relative to peers and S & P 500

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