3 Reasons You Shouldn't Panic Over Coach's Plunge

3 Reasons You Shouldn't Panic Over Coach's Plunge

Shares of Coach fell almost 10% Tuesday after the luxury-goods maker reported underwhelming earnings, which had investors running for the exits.

To be sure, Coach's quarterly revenue of $1.22 billion did fall just short of expectations of $1.24 billion, but earnings per share of $0.89 were in line with analysts' estimates.

So what, exactly, had everybody so worried this quarter?

Look no further than Coach's faltering position in North America, where sales increased just 6% from the same year-ago period, led by a 5% gain in direct sales and hurt as comparable-store sales fell 1.7%. For those of you keeping track, that's a troubling reversal from last quarter's earnings beat, when Coach said its North American comparable-store sales actually rose 1%.

Meanwhile, many investors are looking to Coach's up-and-coming competitor in Michael Kors for growth instead. Remembering Michael Kors' comps jumped an incredible 36.7% last quarter, fueling a 57.1% jump in the company's top line. As a result, and as fellow Fool Rick Munarriz suggested recently, the market would be absolutely shocked if Michael Kors' momentum slows when it reports earnings next week.

In addition, Coach's worries were also amplified when it announced that both its chief operating officer and its North American unit president have made the decision to leave the company, adding to existing worries about the pending departures of Coach's longtime CEO, Lew Frankfort, as well as its creative designer of 16 years, Reed Krakoff.

But does this all mean Coach is done for?


After all, we're still talking about the company that came in at No. 11 on The Motley Fool's list of The 25 Best Companies in America back in February, and it's hard to believe all the strength of such a pervasive brand could dissipate so quickly.

Here are three reasons, then, why I think shareholders should keep calm and carry on in spite of Coach's temporary plunge.

First, while Coach's huge North American segment is currently faltering, the company is proving its brand can also translate well across the globe, as international sales rose 7% year over year to $386 million, or a 17% increase on a constant currency basis.

Most important, Coach's China operations grew a whopping 35% as comparable-store sales for the region continued growing at a double-digit clip. And remember, as I pointed out last month, Coach has stayed busy buying up Asian distributors over the past two years and now directly operates 126 locations in China, 191 in Japan, 48 in Korea, 27 in Taiwan, 10 in Malaysia, and seven in Singapore.

What's more, Coach's earnings press release also stated that, shortly after the quarter ended, the company "acquired the remaining interest in the Coach Europe joint venture, taking control of 18 locations in the U.K., Spain, Ireland, Portugal, France, and Germany."

Management changes
But wait, you say, isn't Coach's management shake-up one of the reasons we should avoid the stock?

After all, Coach will soon lose its longtime creative director in Krakoff, who, in his quest for creative independence, reportedly just purchased his namesake brand back from the company he spearheaded for 16 years.

Krakoff, however, will be replaced by Stuart Vevers, the former creative director of Loewe, a Spanish-based fashion house and subsidiary of LVMH Moet Hennessy Louis Vuitton, and 2006 winner of the British Fashion Council's Accessory Designer of the Year award.

In addition, we've known since February that CEO Frankfort will step down in January 2014, to be replaced by the company's former international head, Victor Luis.

The thing is, it's hard to think of a better person than Victor Luis -- the very man responsible for Coach's impressive international performance -- to morph the company back into shape on the domestic front, while at the same time allowing it to continue pursuing its solid international growth.

And as far as the resignation of both Coach's COO and its North American unit president goes? Well... let's just say perhaps it was time for a change given the weakness in the company's largest segment, anyway.

Shareholder-friendly history
Finally, remember that Coach has a history of rewarding shareholders for their patience through dividends and share repurchases.

Curiously enough, though Coach hasn't repurchased any shares for the past two quarters, in the first half of its 2013 fiscal year the company spent around $400 million to buy back more than 7 million shares of common stock at an average cost of $56.61. That said, Coach still has around $1.4 billion remaining under its current $1.5 billion repurchase authorization, which expires in June 2015, leaving it primed to take advantage of its faltering stock price.

Before that, Coach completely exhausted the previous $1.5 billion repurchase authorization originally announced at the beginning of 2011.

What's more, Coach has more than tripled its dividend after raising it four times in as many years since 2009. At today's prices, then, patient investors can enjoy a solid 2.3% yield.

Foolish takeaway
In the end, while this certainly isn't an exhaustive list, these three things offer a great place to start in understanding why I'm simply not convinced one of the world's most profitable, iconic fashion brands won't eventually come out on top.

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The article 3 Reasons You Shouldn't Panic Over Coach's Plunge originally appeared on Fool.com.

Fool contributor Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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