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Why Investors Remain Wary Despite Coach's Q1 Earnings Beat

Zacks Equity Research
Updated

A leading American marketer of fine accessories and gifts, Coach, Inc. COH boasts a proven strategy of investing to enhance store sales productivity through product innovation, compelling pricing policy, new merchandise assortments, and a cost-effective global sourcing model.

Coach is undergoing a brand transformation and introducing modern luxury concept stores in key markets. The acquisition of Stuart Weitzman has been accretive to its performance, and is being viewed as a significant step in its efforts toward becoming a multi-brand company. Moreover, Coach has undertaken transformation initiatives revolving around products, stores and marketing. Management achieved savings of approximately $100 million from its transformational initiatives in fiscal 2015 and anticipates an additional $50 million in fiscal 2016.

All these helped the company to deliver a positive earnings surprise for the seventh straight quarter when it posted first-quarter fiscal 2016 results. In the trailing four quarters, the company has outperformed the Zacks Consensus Estimate by an average of 6.4%.

Despite the earnings beat, investors retain a cautious stance on the stock. A look at Coach’s performance in fiscal 2015 unveils that net sales of this New York-based company declined 9.7%, 14.1%, 15.5% and 11.6% in the first, second, third and fourth quarters, respectively. Maintaining the same chronological order, we note that earnings per share plunged 31.2%, 32.1%, 47.1% and 47.5%, respectively.

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However, in the first quarter of fiscal 2016, net sales dropped 0.8%, at a rate sharply lower than the preceding quarters. But earnings per share fell 22.6%. A mature domestic market, foreign currency headwinds and cautious consumer spending continue to pose concerns. Nonetheless, we cannot ignore the efforts undertaken by the company toward improving its performance.

The pros and cons embedded in the stock are well reflected by its Zacks Rank #3 (Hold).

Stocks that Warrant a Look

Investors interested in the retail space may consider better-ranked stocks such as Abercrombie & Fitch Co. ANF, American Eagle Outfitters, Inc. AEO, both sporting a Zacks Rank #1 (Strong Buy), and Express Inc. EXPR, carrying a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
COACH INC (COH): Free Stock Analysis Report
 
ABERCROMBIE (ANF): Free Stock Analysis Report
 
AMER EAGLE OUTF (AEO): Free Stock Analysis Report
 
EXPRESS INC (EXPR): Free Stock Analysis Report
 
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Zacks Investment Research