Is Coach still America's premier luxury brand?
Even amid restrained consumer spending, the retailer has shown revenue growth as it expands product lines.
Coach (COH) announced a positive earnings report Tuesday, with second-quarter profit of $1.18 a share beating analyst estimates of $1.15. The company also reported sales of $1.45 billion, surpassing estimates of $1.43 billion.
The company has shown strong revenue growth since emerging from the recession, as it has expanded product lines with more affordable accessories and a larger men's collection. In its earnings call, the company stated that the men's business is on track to double sales this year.
Despite restrained consumer spending over the past year, Coach has retained its title as an affordable luxury brand that many women aspire to have. The company relies heavily on its outlet stores to move merchandise, a strategy that benefits from customers' ongoing love for outlet malls. The company has also moved more production to China to cut costs and boost margins.
A concern for Coach is its reliance on the Asian markets to drive a great deal of its sales. Many analysts have expressed worries that that fading customer demand in China's slowing economy could slow revenue growth for Coach. "The risk is a China blowup," said Morningstar analyst Paul Swinand in an interview with Reuters. "People were assuming luxury is a safe haven and are now rotating out."
The company has also experienced some technical problems. Its website was hacked Tuesday morning and was redirecting some visitors to an unauthorized site. In multiple calls with Benzinga analyst Abhi Rao, Coach representatives showed a lack of coordination on the issue. A customer service representative did not have knowledge of the issue, while a Coach headquarters' spokeswoman stated that the company did know about the problem and was working to remedy the issue.
Despite minor concerns, Coach appears poised to continue growth, as its products are still desired by women across all income levels. An expansion of its product offerings that will appeal to more middle class women, as well as more men's offerings, will help boost revenue growth in the short term. The company's trademark "C" logo bags are still a symbol of American luxury, and will remain in the hearts of women for years to come.
If you believe Coach will continue to generate strong revenue growth, consider these trades:
- Go long Coach. Shares have appreciated considerably since their 2008 lows and will continue to grow as long as the company can find new markets for its products.
- Go long other American luxury brands such as Tiffany & Co (TIF) or Ralph Lauren (RL). If consumers discover their appetite for American luxury goods again, these brands could benefit.
If you believe that customers will continue to show restrained spending, consider these trades:
- Go short Coach. Shares could pull back after their recent gains, and analysts concerns over the buying power of Chinese consumers could weigh on the minds of Coach investors.
- Go short a retail ETF. If Coach struggles to generate significant revenue growth this year, the lack of demand could affect all retailers.
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