Coach Inc.: From Good To Great

Photo credit: bargainmoose

Coach investment thesis 101

I’ve been testing an investment thesis on Coach (COH) for a long time. At the beginning, my thesis was pretty simple: a tarnished luxury brand will perform a successful turnaround. I wrote several extensive articles on why Coach had good chances of succeeding, but it all came down to a humble management acknowledging the damage done to its brand and taking logical steps to heal it.

The company started by focusing on its core brand by hiring a new creative director to reignite the company ethos. At the same time, the company started to revamp its retail stores and curbing excessive discounting practices. The impossibility of a fast adjustment made the performance of the turnaround hard to be evaluated. Only 2 quarters ago did, the positive effects of the transition, translate into noticeable positive figures.

Ok, so now what?

So, the numbers are improving but the sales growth is still slow. The market has acknowledged that, so what can we do with Coach’s stock?

First, a stabilized luxury brand paying a generous dividend is not a bad long term investment at all, even in a low growth scenario. Additionally, if Trump is capable of reigniting inflation, companies with strong pricing power should get a bonus valuation multiple. Basically, as it is Coach should be a good investment in the perspective of a buy-and-hold investor.

However, the story doesn’t end here. Now that the previous turnaround speculation is starting to materialize, there are signs that justify introducing further speculation.

 From good to great

The management team is not just hoping to reap the rewards of a successful turnaround. Victor Luis and his team are focusing on the next step: getting Coach growing again. Initially the strategy was taking Coach from an accessories producer to a full-fledged fashion house. This was partially achieved, but it takes time to change the public’s perception and to get the positioning right. Managing an accessories brand is significantly different from managing a clothing fashion brand.