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COACH, Inc. (COH) Stock Analysis Victoria Karasik - Leeds School

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COACH, Inc. (COH) Stock Analysis
Victoria Karasik
Table of Contents
Investment Thesis ..................................................................................................................................................................................................... 1
Industry Overview ..................................................................................................................................................................................................... 2
Business Description ................................................................................................................................................................................................. 4
Brief History .............................................................................................................................................................................................................. 4
Mission Statement .................................................................................................................................................................................................... 5
Management ............................................................................................................................................................................................................. 6
Business Segments .................................................................................................................................................................................................... 9
Direct-to-Consumer Segment .............................................................................................................................................................................. 9
North American Retail Stores ......................................................................................................................................................................... 9
North American Factory Stores .................................................................................................................................................................... 10
Internet ........................................................................................................................................................................................................ 10
Coach Japan .................................................................................................................................................................................................. 10
Coach China .................................................................................................................................................................................................. 10
Indirect Segment................................................................................................................................................................................................ 11
U.S. Wholesale.............................................................................................................................................................................................. 11
Coach International ...................................................................................................................................................................................... 11
Licensing ....................................................................................................................................................................................................... 11
Sales Mix ................................................................................................................................................................................................................. 12
Dividends and Free Cash Flows Returned to Shareholders ..................................................................................................................................... 13
Key Risks and Growth Drivers .................................................................................................................................................................................. 15
Key Risks ............................................................................................................................................................................................................ 15
Economic Factors and Conditions ................................................................................................................................................................. 15
Risks from Operating Internationally ............................................................................................................................................................ 15
Key Growth Drivers ............................................................................................................................................................................................ 16
International Operations .............................................................................................................................................................................. 16
Sensitivity Analysis .................................................................................................................................................................................................. 17
Porter’s Five (6) Forces ............................................................................................................................................................................................ 19
Valuation ................................................................................................................................................................................................................. 21
Multiples Valuation ............................................................................................................................................................................................ 21
Coach’s Peer Group as Determined by Management ................................................................................................................................... 21
Luxury Designers .......................................................................................................................................................................................... 23
DCF..................................................................................................................................................................................................................... 25
Appendix ................................................................................................................................................................................................................. 27
Income Statement ............................................................................................................................................................................................. 27
Balance Sheet .................................................................................................................................................................................................... 27
Inputs ................................................................................................................................................................................................................. 28
Relevant Metrics and Ratios .............................................................................................................................................................................. 28
Investment Thesis
Coach is an excellent company to invest in for several reasons. Although it is in a sector that is incredibly
sensitive to the economy, Coach is able to grow when the economy grows, but still make a profit when it
doesn’t. For example, when most companies had decreasing profits for fiscal 2009, Coach was able to
increase their revenues by 2% from the previous year. This is most likely due to their expansive
distribution network throughout the world. They were able to cushion a slight downturn in profits in the
U.S. with gains in revenues around the world. They should be able to keep doing this even better as they
keep expanding abroad.
This ability to keep increasing revenues is also a function of Coach’s tiered pricing strategy. Coach sells
bags at full price from $140 to $1000. This allows many different consumers to purchase their products.
Also, Coach’s factory stores, which sell their handbags at a discount, help it to do well when the
economy takes a downturn because consumers feel like they are getting a bargain.
Also, Coach recently acquired a major distributor in China. Now it is able to better control and manage
their operations in China and increase profits in that region even more. China has massive growth
potential, as they have a rising affluent middle class that needs to prove its success through luxury
purchases. This is discussed in more detail later on.
In addition, Coach has almost no long term debt. The only debt it really even has on its balance sheets is
from acquiring the distributor in China. Even that large purchase put a small amount of debt on its
balance sheets relative to its assets and equity. Coach is able to easily pay off all of its debt with a three
year working capital to debt ratio average of 1.04, and a three year current ratio average of 2.86.
Also, Coach is returning an incredibly large percentage of its free cash flows to its shareholders – an
average of 120% over the last three years. This comes from not only dividends, which it recently started
paying in the last two years, but also from stock buybacks which adds value to the shareholders.
In addition, Coach has very high margins, even relative to its competitors. Even its “luxury” competitors
such as Moet Hennessey Louis Vuitton and Hermes, who charge significantly higher prices than Coach
does, don’t have as high a gross margin as Coach.
Coach’s strong management is also a major reason for Coach being a great company. The age of
management is relatively young – most are in their 40s or early 50s – but they all have vast experience in
the industry and in their positions. The CEO Lew Frankfort is the oldest of senior management, but has
been with Coach for thirty two years and has been CEO for half of those years, providing him with lots of
experience on how to manage and direct Coach. The rest of senior management, with the exception of
Michael Devine who is retiring in August, is far from retiring and are ready to keep Coach growing.
Page | 1
Industry Overview
Coach is in the Consumer Discretionary sector of the S&P500. This sector is currently 10.9% of the total
S&P500, making it one of the largest. This sector is very cyclical and changes significantly with market
fluctuations as it encompasses the industries that tend to be the most sensitive to economic cycles.
Overall industry demand is driven by general economic trends including changes in disposable income,
consumer confidence, and consumer spending. This sector is also incredibly sensitive to interest rates,
as increases in rates affect both the companies and the consumers. The Consumer Discretionary sector
is split up into five distinct subsectors: Media (24.51%), Automobiles and Components (24.32%),
Retailing (23.87%), Consumer Durables and Apparel (14.18%), and Consumer Services (12.95%).
After evaluating each of these subsectors in terms of their risk and growth drivers, multiples, levels of
demand and supply, number of competitors and strengths, and ease of entry into and exit from the
market, it was determined that Retailing seemed to be the most profitable sector. Also, it was seen that
Retailing has the best historical revenue growth and ratios as well as potential for future growth. After
diving deeper into the Retailing sector through ratio analysis, Coach was picked as it had the best ratios
and drivers, as well as solid financials.
ROIC
P/S
P/E
Automobiles & Comp.
3.9
.8
26.7
Consumer Dur./App.
9.9
1.3
22.3
Consumer Services
16.3
1.9
22.6
Media
8.1
1.4
22.1
Retailing
17.2
1.1
21.0
Revenue Growth
1-Year Avg.
5-Year Avg.
10-Year Avg.
Automobiles & Comp.
0.064
-0.041
0.022
Consumer Dur./App.
0.134
-0.036
0.034
Consumer Services
-0.024
0.072
0.251
Media
-0.058
0.048
0.077
Retailing
0.032
0.068
0.103
Page | 2
The luxury handbag industry, although also discretionary, is affected less than the sector by cyclicality.
As interest rates increase and people have less discretionary income, the people that are spending lots
of money on expensive handbags will still have the money to do so and will continue to do so.
Page | 3
Business Description
Coach started as a family-run workshop in Manhattan and has become a leader in producing fine
American-style accessories and gifts for men and women. Coach is one of the most recognized fine
accessories brand in the U.S., with almost 40% market share in the luxury handbags market, as well as
large market share in targeted international markets. Coach uses various pricing points to target a loyal
and growing customer base by offering premium lifestyle accessories that are extremely well made, at a
price it hopes is attractive to consumers. Coach strives to make their products fresh, relevant and
innovative to appeal to their consumer’s demands for both fashion and function. Coach is constantly
coming out with new styles to keep bringing customers back for more.
Several key elements differentiate Coach from its competitors. Coach has a distinctive brand, which is
easily recognizable and offers products that are relevant, well made, and provide an excellent value.
Coach also has a market leadership position with growing share. Its consistently growing market share
reinforces its leadership position in the luxury handbag and accessories market. In addition, Coach has a
loyal and involved consumer, who they believe has a specific emotional connection with the brand that
keeps them coming back. Also, Coach uses multi-channel international distribution, which allows Coach
to maintain the critical balance that they believe enhances their performance internationally. Coach is
also innovative and consumer-centric, allowing it to listen to its consumer through rigorous consumer
research and strong consumer orientation. Coach anticipates the consumer’s changing needs and in turn
keeps the product assortment fresh and relevant to what the consumer desires. These various
differentiating elements have allowed Coach to be a leader in the marketplace.
Brief History
Coach was founded in 1941 and was acquired by Sara Lee Corporation in 1985. Coach became
incorporated in the state of Maryland in June 2000. The following October it was listed on the New York
Stock Exchange and sold approximately 68 million shares of common stock, representing 19.5% of
current outstanding shares, split adjusted. In April 2001, a distribution of remaining ownership in Coach
by Sara Lee was arranged via an exchange offer.
Coach Japan was formed in June 2001 in order to expand presence in the Japanese market and have
greater control over the Coach brand in Japan. Initially, Coach Japan was formed as a joint venture with
Sumitomo. However, on July 1, 2005, Coach purchased Sumitomo’s 50% interest in Coach Japan,
allowing Coach Japan to become a 100% owned subsidiary of Coach, Inc.
Coach acquired the domestic retail businesses in Hong Kong, Macau and mainland China from its former
distributor, the ImagineX group in 2009. This allowed Coach to exercise greater control over the brand in
China, enabling them to aggressively grow market share with the Chinese consumer.
In October 1999, Coach entered the e-commerce arena with the launch of Coach.com, providing an
additional image-enhancing environment where Coach customers could shop.
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During fiscal 2008, Coach announced new business initiative to drive brand creativity. This initiative
transformed into a brand of its own, Reed Krakoff, which targets the New American luxury market. Store
openings in North America and Japan occurred earlier this year; therefore it is too early to tell how
successful the brand is and will be.
Mission Statement
“Coach seeks to be the leading brand of quality lifestyle accessories offering classic, modern American
styling.”
Coach’s mission statement shows that it has focus and a goal that it wants to attain. Coach is focused on
a specific type of style – classic, modern American, and wants to be the leader in that segment. In
addition to this one sentence on its mission statement page, Coach also lists its values, as follows:
The Brand is our Touchstone. Coach believes that the value of their brand is the most important aspect
of their company. Their brand stands for quality, authenticity, value, and the distinctive American style
that is part of their mission statement. This brand helps them to bring in new customers and retain old
ones.
Customer Satisfaction is Paramount. Coach believes that impeccable service to their clients is the most
important thing they can do to ensure the client’s needs are met. They seek to treat customers as they
would guests in their own home, and this helps to establish long-term relationships with their clients
that are based on trust and satisfaction.
Integrity is Our Way of Life. Coach believes that honesty and fairness are uncompromisingly important
to their success, and stake their name and reputation on every product they make.
Innovation Drives Winning Performance. Coach strives to be the very best they can be in every aspect of
their business. They use their innovation to increase both consumer and shareholder value.
Our Success Depends on Collaboration. Coach believes that the people it brings in are an important part
of the brand and product it creates. Coach believes that the brand flourishes through the people it hires,
and this can be seen through the success of its management. The values of the brand – customer
satisfaction, integrity, innovation and collaboration – are the reasons Coach's people come to work each
morning.
Coach’s mission statement and values helps to reaffirm how Coach will retain current customers and
bring in new clients successfully. All of their values help to create the business that they believe will be
successful. The mission statement and values help show Coach’s strategic intent and how it plans on
achieving it. Coach believes that these differentiating elements enable it to offer a unique proposition to
the marketplace, allowing it to be more successful than its competitors. This is clearly working as Coach
holds the number one position within the U.S. premium handbag and accessories market and the
number two position within the Japanese imported luxury handbag and accessories market.
Page | 5
Management
One of the reasons Coach has been so successful in the past and will continue to do so in the future is its
management. Coach has a solid management team with enormous experience in the industry and
massive talent. Although their CFO, Michael F. Devine, III, is set to retire in August, the search is
currently ongoing for his replacement. The remainder of senior management is set to stay on board for a
while. Also, Lew, their CEO, is well liked and has been at the company for thirty two years, sixteen of
those as CEO. This provides him with lots of experience and he has learned with time what works for the
business and what doesn’t. Other senior management also has lots of experience and is greatly
beneficial to Coach’s past and future success.
Lew Frankfort – Chairman and Chief Executive Officer – 64 years old
Lew has been Chairman and CEO for sixteen years, and has been with Coach for 32. He first joined the
company in 1970 as Vice President of New Business Development, when sales where just $6 million. He
has transformed the company into the premier American accessories brand it is today, with sales last
year of over $3.6 billion. Lew graduated from Hunter College and has an MBA in Marketing from
Colombia University. Before he worked for Coach, he spent ten years working for the New York City
government, which could be beneficial if dealings with the government are necessary. Some of Lew’s
recognitions are: Barron’s recognized Mr. Frankfort from 2005-2008 as one of 30 “Most Respected
CEO’s” globally, Business Week named Coach one of the Top Performers in the “Business Week Fifty” in
each of the last five years, and Institutional Investor magazine voted Mr. Frankfort as the top CEO in his
sector for years 2004 through 2009. Lew has helped build Coach’s strong customer franchise by
broadening product offerings, modernizing stores, improving operational efficiency, and growing the
brand’s international presence, among many other things – all of which has contributed to improve
sales, net income, and earnings growth. Currently, Lew also serves on the Board of Overseers for
Columbia University’s Business School, as well as holding a spot on the Board of Directors of Teach for
America and Advanced Assessment Systems. Lew has a proven track record of delivering sustainable
long-term growth, and, in addition to his more than thirty years of exemplary leadership to Coach and
his depth and breadth of knowledge of the business, this shows that he is very qualified for his position.
Reed Krakoff – President, Executive Creative Director – 46 years old
Reed has been with the company since 1996 as Senior Vice President and Executive Creative Director
and was appointed President two and half years later. Upon receiving a degree in Fashion Design from
Parsons School of Design, Reed began his career in fashion from the ground up, working first with Anne
Klein, eventually spending five years at a top position at Ralph Lauren. Reed is considered the architect
of the Coach brand, and as such is responsible for design, store concept, marketing, and worldwide
positioning for the brand. His success in these areas helped strengthen Coach’s already strong brand
image and contributed to increased sales throughout the world. In 2007, Reed was elected Vice
President of the Council of Fashion Designers of America after receiving Accessories Designer of the Year
from the CFDA in both 2001 and 2004. Reed recently started his own, more expensive, division of Coach
entitled the Reed Krakoff Collection. Success of the RK Collection is yet to be determined as it was newly
Page | 6
launched in early 2011. In addition to serving on the board at Parsons School of Design, he is a mentor
for the CFDA Vogue Fashion Fund.
Jerry Stritzke – President and Chief Operating Officer – 49 years old
Jerry joined Coach as Chief Operating Officer and President in March 2008. Before coming to work for
Coach, Jerry served as Chief Operating Officer for Victoria’s Secret, among other senior executive
positions for Limited Brands. Before coming to Limited Brands in 1999, Jerry was a consultant with a
retail consulting firm for six years, after practicing law at Best, Sharp, Sherdan, and Stritzke since 1985.
Jerry graduated from Oklahoma State University and has a Juris Doctor from the University of
Oklahoma.
Michael Tucci – President, Retail Division – North America – 42 years old
Michael joined Coach in January 2003 and brings over twenty years of experience in the retailing and
merchandising field. Before coming to Coach, Michael served as Executive Vice President of Gap, where
he held senior leadership positions for eight years. Prior to joining Gap, Michael held executive positions
at Macy’s and its specialty store division, Aeropostale from 1982 to 1992. Michael graduated from
Trinity College in Connecticut with a degree in English.
Michael F. Devine, III – Executive Vice President and Chief Financial Officer – 51 years old
Michael joined Coach in December 2001 as Senior Vice President and Chief Financial Officer before
being appointed Executive Vice President in August 2007. Prior to joining Coach, Michael served as CFO
for several other companies, such as Mothers Work, Strategic Distribution, Industrial System Associates,
and McMaster-Carr Supply starting in 1989. In addition to his position at Coach, Michael is a member of
the Board of Directors of NutriSystem and Express. Michael graduated with a degree in Finance and
Marketing from Boston College and has an MBA in Finance from the Wharton School of the University of
Pennsylvania. Michael has decided to retire in August 2011, and the process for replacing him is
currently underway.
Todd Kahn – Senior Vice President, General Counsel and Secretary – 46 years old
Todd joined Coach as his current position in January 2008. Prior to joining Coach, Todd served as
President and Chief Operating Office of Calypso Christian Celle from July 2007, and before that he
served as Executive Vice President and COO of Sean John, a private lifestyle apparel company from
January 2004. Prior to joining Sean John, Todd was also President and COO of Accessory Network,
InternetCash Corporation, and Salant Corporation. Before all of Todd’s work as a COO, he was a
corporate attorney in New York for 5 years, starting in 1988. Todd graduated magna cum laude from
Touro College and has a Juris Doctor, cum laude, from Boston University Law School. In addition to his
position at Coach, Todd serves on the Board of Directors of the Fashion Institute of Technology
Education Foundation, the Fashion Delivers Charitable Foundation, Inc. and the National Father’s Day
Committee.
Sarah Dunn – Senior Vice President, Human Resources – 50 years old
Page | 7
Sarah joined Coach as her current position in July 2008. Prior to joining Coach, Sarah held several
executive positions at Thomson Financial starting in 2003. At Thomson, she was responsible for
attracting, retaining and developing talent worldwide, as well as managing the organizational needs of
Thomson Financial’s leadership and over 9,000 employees. Before Thomson, Sarah spent sixteen years
working for Reuters, as well as being CEO of Lipper, a Reuters company. Sarah graduated from
University College in London and has a Masters degree in Information Science from City University in
London. In addition to her position at Coach, Sarah also sits on the board for the Coach Foundation and
is a Consulting Advisory Board member of Youth, I.N.C.
Page | 8
Business Segments
Coach is divisible into two distinct reportable segments: Direct-to-Consumer and Indirect. The two
segments represent different channels of distribution, but offer similar products, service, and marketing
strategies. Both of these segments are split up into several different channels.
Business Segments as a Percentage of Net Sales for
2010
Direct-to-Consumer North
American Stores and the Internet
Direct-to-Consumer Coach Japan
20%
3%
0%
7%
Indirect
13%
0%
Direct-to-Consumer Coach China
5%
64%
Indirect U.S. Wholesale
Indirect Coach International
1%
Indirect Licensing
Direct-to-Consumer Segment
The Direct-to-Consumer segment consists of channels that provide Coach with immediate and
controlled access to consumers. It is divided into Coach-operated stores in North America, Japan, Hong
Kong, Macau and mainland China, the Internet and the Coach catalog. This segment represented 87% of
Coach’s total net sales in fiscal 2010, so it makes up the majority of their business. North American
stores and the Internet, Coach Japan, and Coach China contributed approximately 64%, 20% and 3% of
total net sales, respectively.
North American Retail Stores
Coach positions its stores in regional shopping centers and metropolitan areas throughout the U.S. and
Canada. Depending on the size and location, these stores carry a variety of products, with the flagship
stores located in high-visibility locations such as New York, Chicago, and Toronto offering the broadest
assortment. The stores are meant to enhance the shopping experience while reinforcing the image of
the Coach brand, which is very important to Coach. Coach trains its store associates to maintain high
standards of visual presentation, merchandising and customer service. This keeps customers coming
back and identifying with and trusting the Coach brand.
Page | 9
North American Factory Stores
Coach uses its factory stores as an efficient means to sell not only discontinued and irregular
merchandise, but some manufactured-for-factory-store product, including factory exclusives, as well.
These stores are geographically positioned primarily in established outlet centers that are generally
more than 40 miles from major markets. Although these stores reinforce Coach’s image and position,
factory stores are able to target value-oriented consumers who would not otherwise buy the Coach
brand. Generally, prices are discounted from 10% to 50% below full retail prices.
Internet
Coach views its website as a key communications vehicle for the brand to promote traffic in the retail
stores and to build brand awareness. The website provides a showcase environment where consumers
can browse through a large assortment of Coach’s products and see the latest styles and colors. With
approximately 59 million unique visits in fiscal 2010, the website is successfully able to reinforce their
brand in consumer’s mind and bring them in to the retail stores.
Coach Japan
Coach Japan is made up of department store shop-in-shop locations, freestanding flagship, retail and
factory stores, and an e-commerce website. Coach Japan operates flagship stores, which offer the
broadest assortment of products, in selected shopping districts throughout Japan. Today, Coach
generates nearly 20% of its revenues from sales in Japan and has more than 10% share in the Japanese
luxury handbag market. Although 20% of its revenues do come from Japan, Coach reacted by closing
twenty of its 165 retail locations right after the earthquake, helping to limit its exposure in Japan. Also,
Coach only has 10% exposure in the tsunami-stricken Sendai region, and its Tokyo office remained open
and has reported no disruptions to its inventory and logistics. It has been said that Japanese consumer
sentiment may drop as much as 20%, but will likely recover in three months, therefore not drastically
affecting Coach’s bottom line.
Coach China
Coach China is made up of department store shop-in-shop locations, as well as freestanding flagship,
retail and factory stores. Just like in Japan, flagship stores offering the broadest assortment of products
are located in select shopping districts throughout Hong Kong and mainland China.
Page | 10
Indirect Segment
Coach began as a U.S. wholesaler to department stores, so this segment remains very important to them
in overall consumer reach. Coach works closely with their partners in order to ensure product
presentation is clear and consistent with the brand image. This segment represented 13% of total net
sales in fiscal 2010, with U.S. Wholesale and Coach International representing approximately 7% and 5%
of total net sales, respectively. The Indirect segment also includes royalties earned on licensed products.
U.S. Wholesale
The U.S. Wholesale channel is for consumers who prefer to shop at department stores. In addition to
large product offerings at select department stores, Coach products are available on macys.com,
dillards.com, and nordstrom.com. Although overall sales in department stores have not increased over
the past few years, the handbag and accessories category has remained robust due to the strength of
the Coach brand. In order to better match the attributes of their department store consumers in each
local market, Coach custom tailors its assortments through wholesale product planning and allocation
processes. Coach’s products are sold through approximately 940 wholesale locations in the U.S. and
Canada.
Coach International
The Coach International channel represents sales to international wholesale distributors and authorizes
retailers. In this channel, travel retail represents the largest portion of their sales. Coach has developed
relationships with a select group of distributors that any other handbag company would have a hard
time replicating. These distributors sell Coach products through department stores and freestanding
retail locations in over twenty countries including South Korea, Australia, southeast Asia, Mexico, Russia,
India, France, Greece, and several countries in the Middle East. Coach continues to improve productivity
in this channel by opening larger image-enhancing locations, expanding existing stores and closing
smaller, less productive stores. After fiscal 2010, Coach entered an agreement with a key distributor to
take control of their domestic retail businesses in Singapore and Malaysia. Also, Coach finalized an
agreement with an international partner to form a joint venture to expand Coach International business
in Europe. First sales from this joint venture began in early 2011.
Licensing
Coach also licenses certain products with a partner such as watches with Movado and footwear with
Jimlar. In these relationships, Coach takes an active role in the design process and controls the
marketing and distribution of products under the Coach brand. Most of these licensed products are sold
through all of the channels discussed above, as well as several other channels preapproved by Coach.
Royalties from licensed products currently comprise less than 1% of Coach’s total revenues, but they
provide Coach with additional, controlled, exposure for their brand.
Page | 11
Sales Mix
The following is a chart of Coach’s sales mix by product category. The majority of their products are
handbags, but they sell many other products as well.
9%
Handbags
28%
Accessories
63%
Other
The accessories category includes women’s small leather goods (money pieces, wristlets and cosmetic
cases), men’s small leather goods (wallets and card cases) and novelty accessories including electronic,
time management and pet accessories, key fobs and charms. The other category includes footwear,
outerwear, sunglasses, watches, travel bags, jewelry and fragrance. Although the majority of Coach’s
products are handbags, which are what the company started off making and is best at, it sells other
products to supplement profit.
Page | 12
Dividends and Free Cash Flows Returned to Shareholders
Coach recently, as of fiscal 2010, started paying out dividends. It started with a yearly dividend of $.30
and increased after a year to $.60. Coach has very strong margins, and therefore should keep increasing
their dividend. The graph below details Coach’s past yearly dividends and predictions for future growth
at a rate of 7.63% This rate was determined by calculating dividend value 100 years from today using
decreasing interest rates every few years and discounting back to the present to find the assumed long
term growth rate. This rate was then used to calculate future expected dividends.
2
1.5
1
Past Dividends
0.5
Future Dividends
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Calculating free cash flows returned to shareholders in the past as well as predictions for the future
involved first finding dividends paid in 2010 and growing those out at a rate of 7.63%. Then common
stock repurchased was added. To find future common stock repurchased, past numbers were divided by
corresponding free cash flow numbers, then averaged. The 3-year average of 117% was used as
numbers from previous years seemed to be outliers. To calculate free cash flows returned to
shareholders, the two numbers were added together. Then, this FCF returned to shareholders number
was divided by total FCF to get the percentage paid out to shareholders. Once Coach declared dividends,
the numbers evened out more, as seen on the graph below. The dividend payout ratio, calculated by
dividing dividends by net income, is also plotted on this graph, with corresponding numbers on the right
vertical axis.
250%
0.15
200%
0.12
150%
0.09
100%
0.06
50%
0.03
0%
0
-50%
-0.03
-100%
-0.06
-150%
-0.09
-200%
-0.12
Percent FCF returned to
Shareholders
Past Dividend Payout
Ratio
Page | 13
Dividends can also be used to predict the expected return on both Coach and the S&P500.
Using the same model used to determine a long term dividend growth rate of 7.63%, the assumed
future dividend yield for Coach is 2.05%. Adding this to the dividend growth rate, an expected return of
9.68% is attained. Using a dividend yield of 2.23% for the S&P500 as an average of the dividend paying
stocks and a long term growth rate of 5.5%, an expected return of 7.73% for the S&P500 is attained.
Since Coach’s expected return is higher, it makes the case for Coach being a better investment than the
S&P500. This can be seen for the past five fiscal years on the graph below.
A graphic representation of normalized Coach return, the return of its peer group as defined by
management and used later in multiples valuation, and the return of the S&P500 is below.
COH
Peer Group
S&P 500
Jul-05
Jun-06
Jun-07
Jun-08
Jun-09
Jul-10
100.00
100.00
100.00
79.97
100.90
104.74
144.70
128.19
131.72
105.95
93.16
123.26
77.59
55.02
84.78
104.19
82.60
94.25
Page | 14
Key Risks and Growth Drivers
Key Risks
Economic Factors and Conditions
Companies like Coach are highly affected by current economic conditions. Several macroeconomic
factors could have a negative impact on Coach’s results including but not limited to consumer
confidence and spending levels, unemployment, consumer credit availability, fuel and energy costs,
global factory production, commercial real estate market conditions, credit market conditions and the
level of customer traffic in malls and shopping centers. Demand for Coach’s products is significantly
impacted by negative trends in economic factors affecting consumer spending behavior.
A downturn in the economy could also affect Coach in that fewer consumers would be willing to buy
their products. A downturn in the economy would cause consumers to have lower disposable income,
therefore being able to spend less on discretionary products such as Coach handbags. If demand for
Coach products decreases and Coach doesn’t anticipate this, Coach could have increased costs due to
excess inventories.
Risks from Operating Internationally
Because Coach has a large market overseas, there are many large risks associated with operating
internationally. Several risks under this category are unavailability of raw materials, compliance with
labor laws and other foreign governmental regulations, disruptions or delays in shipments, political
unrest, and natural disasters. Although Coach has business continuity and contingency plans for their
sourcing sites, if any of the above were to occur and interrupt product supply, if Coach couldn’t resolve
it in a timely manner, it could have an adverse impact on their income.
Also, Coach is currently expanding even further internationally than the distribution channels it already
has in place. As discussed previously, it just entered a joint venture in Europe to begin distributing
products there earlier this year. A lot of Coach’s future growth plans rest on expanding internationally as
the domestic market will most likely not get very much larger. Coach currently has 470 stores in the U.S.
and it estimates capacity at 500. Therefore, much of Coach’s future growth rests on its ability to expand
internationally successfully.
Currently, approximately 30% of Coach’s net sales come from operations outside the U.S. However,
sales to international wholesalers are denominated in U.S. dollars, and as such it is subjected to changes
in exchange rates, political or economic instability, and changes in foreign legal and regulatory
requirements. Changes in any of these could negatively impact Coach’s earnings. In addition to being
protected through their geographic diversity, Coach minimizes their exposure to changes in exchange
rates through foreign currency hedging. Coach enters into zero-cost collar options to manage its
exposure to foreign currency exchange rate fluctuations resulting from Coach Japan’s and Coach
Canada’s U.S. dollar-denominated inventory purchases.
Page | 15
Key Growth Drivers
International Operations
According to Coach, the company is nearing capacity for total stores in the U.S. market. Therefore, one
of their biggest growth drivers is growing internationally, especially in emerging markets. Luxury
consumption in China, for example, has seen double digit growth in recent years as a result of rapid
economic growth and rising standards of living in China. The Chinese market is expected to become the
largest luxury market by 2014 comprising an estimated 23% of the world market, providing tremendous
growth potential. Other emerging markets including Brazil, South Asia and Central Asia will experience
25-30% surge in spending on luxury goods in the next five years as personal wealth, spending capacity
and fashion consciousness increase in these markets.
Coach has benefitted from the increasingly prosperous Chinese consumers demanding foreign luxury
brands to highlight their status, as well as little regulation and interference from the Chinese
government. Coach was also successful in avoiding direct competition with luxury brands such as Louis
Vuitton and Gucci by marketing itself as an “affordable” luxury company, rather than “absolute” luxury.
New Product Development and Innovations
Developing new products in time and in pace with what consumers demand is essential to Coach’s
growth. As mentioned earlier, Coach is innovative and consumer-centric, allowing it to listen to its
consumer through rigorous consumer research and strong consumer orientation. Coach anticipates the
consumer’s changing needs and in turn keeps the product assortment fresh and relevant to what the
consumer desires. This should increase its growth because not only will it bring in new consumers
through great new products, but it will keep old consumers coming back by giving them something new
that they desire every season.
Page | 16
Sensitivity Analysis
Sensitivity analysis was done one several factors deemed very important to Coach’s success. They
factors all relate to the risks and growth drivers discussed above.
A sensitivity analysis was done on rising raw materials costs. This would increase Coach’s COGS and be
detrimental to their margins. Although Coach has had very consistent COGS as a percentage of
revenues, something like a sudden rise in material costs would affect their consistency. The base-case
assumption for COGS/Sales is 27%, attained from averaging past results and making it a little higher than
average to be conservative. The range was 7% either way, which is a pretty large margin considering
how consistent Coach’s COGS have been in the past as a percentage of sales.
Bull
COGS/Sales
Implied Stock Price
20%
108.7957
Base
27%
80.93468
Bear
34%
53.07362
A sensitivity analysis was also done on operating internationally. Coach sells many of their products
abroad and because of this they have both huge risks and large growth potential. If something out of
their control happens in a country that negatively impacts demand for their products, Coach’s profits
could suffer and in turn so would their stock. However, having a large presence internationally allows
Coach many opportunities to profit and grow vastly. Sensitivity analyses were done on both Coach’s
revenue from Coach Japan, as well as Coach’s revenue from Other International. This “other” category is
mainly comprised of Coach China, along with small profits from 20 other countries. This is their fastest
growing division and if it were to not continue to grow as quickly as expected, this would have a
negative impact on their margins.
Coach Japan revenues were decreased by 2% because the growth percentage was already very
conservative. It was increased by 4% for the bull case to make up for the conservative base case. The
first year is also 2% lower than the rest of the years in every case to allow for smaller revenues from
Japan because of the earthquake.
Coach Japan
%∆ Revenues
Implied Stock Price
Bull
12%
88.55
Base
Bear
8%
80.93468
6%
77.52046
Coach Other revenues were increased/decreased by higher percentages because the predicted revenue
growth is so large to begin with in the base case. This allows for growth to both exceed conservative
expectations and also to grow much less than expected. The base case has growth starting out at 50%
then decreasing to 35% year by year in case the high growth doesn’t continue. The bear case has the
growth rate for all 5 predicted years to be 25% and the bull case has the growth rate at 50% for all 5
years.
Page | 17
Coach Other
%∆ Revenues
Implied Stock Price
Bull
50%
101.2766
Base
45%
80.93468
Bear
25%
43.77645
As seen through this analysis, Coach’s stock price is significantly more impacted by growth in China and
other countries, which has such a large range, rather than growth in Japan, which is minimal.
A sensitivity analysis was also done on Coach’s ability to meet consumer demand with products the
consumer actually wants. Coach needs to be able to differentiate itself and sell new products each
season that the consumer actually wants to buy over products from another company. Although Coach
has excellent management, it is possible that it won’t be able to correctly predict what consumers want.
The ability of Coach to produce a product the consumer wants is modeled by an increase/decrease in
overall revenue.
Coach Total
Revenues
%∆ Revenues
Implied Stock Price
Bull
18%
121.9669
Base
16%
80.93468
Bear
12%
25.75
Obviously, Coach is very affected by changes in its total revenue.
Page | 18
Porter’s Five (6) Forces
Threat of New Entrants – 2/5 Medium-Low
Coach is already a brand that people identify with. New designers can enter the market, but there are
decent sized startup costs, as well as lack of an identified name. New entrants would have to prove
themselves to the consumer before they could start charging a premium. Also, Coach has stores
internationally, along with holding the largest market share in the luxury handbags industry. This
provides it with large economies of scale that a new entrant would have to compete against. In addition,
new entrants would have to create extensive distribution channels in order to compete with the large,
widespread channels Coach has in place.
Threat of Substitutes – 4/5 Medium-High
There are many different luxury handbag designers. Consumers have the choice to pick among
whichever one they want and don’t have to keep buying from the same designer. The only thing that
keeps consumers coming back is brand name and recognition, which is very strong for Coach. Coach also
has an advantage in that it has Factory stores in addition to its regular stores which sell the same quality
products for even cheaper. This helps keep consumers from switching to other brands for price reasons.
However, in the luxury handbag industry, the threat of switching between different designers is high as
it is relatively easy for consumers to do so.
Bargaining Power of Buyers – 3/5 Medium
Buyers have the ability to switch between whichever brands they choose, as switching costs are
inexistent. If buyers have less discretionary income, they will not buy expensive, luxury products such as
Coach and its competitors. Although Coach has a differentiated brand that consumers know, identify
with, and trust it is still very easy for a consumer to decide a Coach product is too expensive and buy a
different brand.
Bargaining Power of Suppliers – 3/5 Medium
Coach is partially vertically integrated from just having purchased a large distributor in China. However,
it is still subjected to raw materials prices, which could easily increase and in turn increase Coach’s costs.
All of the industry’s raw materials are relatively similar, so if one supplier threatened to increase prices,
luxury handbag makers could easily buy from a different supplier. The raw materials used such as
leather are available from many suppliers, although the quality differs. Quality of materials allows
suppliers to have a lot of power in this industry. However, since most luxury handbag companies,
especially Coach, buy supplies in large volumes, this provides them with a decent degree of power over
the suppliers.
Intensity of Competitive Rivalry – 4/5 Medium-High
Rivalry between luxury handbag companies is intense. They all have a slightly differing product and are
competing for large sums of dollars from a few. All these numerous companies need to distinguish their
product and spotting new trends first is increasingly important. There is a good amount of room for the
Page | 19
industry to grow and expand, especially into developing countries such as China, as the amount of
affluent consumers increases in these countries. Branding is incredibly important in this industry and
consumers tend to choose brands they know and trust for repeat business. Coach has a very strong
brand name and image so this decreases its competition slightly, as many consumers are looking for a
Coach product specifically when they go buy a handbag or other accessory.
Government – 1/5 Low
The government minimally affects luxury handbag companies, with regulation on their raw materials
and labor costs. Government is actually on Coach’s side in terms of regulation. It provides regulation to
prevent counterfeit products from appearing in the market that could potentially take away some of
Coach’s consumers.
Page | 20
Valuation
Multiples Valuation
Coach was valuated against several of its competitors to see what Coach’s implied stock price should be.
Coach was compared to two different groups of competitors – its peer group as identified by
management, and a group of “absolute” luxury handbag companies. There is no company that is an
exact or even very similar competitor to Coach, so both groups were used to value Coach. Direct
competitors for Coach were extremely difficult to find as there really is no company that has the massive
distribution channels, various pricing points, and the factory stores that Coach has. In addition, many of
Coach’s competitors are privately owned, making it difficult to find financial information. Therefore,
comparisons were done for both what management considers to be Coach’s “peer group”, as well as
several high end luxury designers which are publicly owned. The peer group has a 60% weighting as their
pricing is more similar to Coach, and the “absolute” luxury group has a 40% weight.
Coach’s Peer Group as Determined by Management
AnnTaylor Stores Corp. (ANN)
ANN INC. operates as a specialty retailer of women’s apparel, shoes, and accessories primarily in the
United States. It offers a range of career and casual separates, dresses, tops, weekend wear, shoes, and
accessories under the Ann Taylor and LOFT brands. The company sells its products through traditional
retail stores and on the Internet at anntaylor.com and LOFT.com, as well as through the phone. As of
January 29, 2011, it operated 896 retail stores comprising 266 Ann Taylor stores, 502 LOFT stores, 92
Ann Taylor Factory stores, and 36 LOFT Outlet stores in 46 states, the District of Columbia, and Puerto
Rico.
Kenneth Cole Productions Inc. (KCP)
Kenneth Cole Productions, Inc. designs, sources, and markets a range of fashion footwear and handbags
in the United States and internationally. The company, through license agreements, also designs and
markets apparel and accessories under many various names. In addition, the company provides private
label footwear and handbags for selected retailers. The company’s products for men include tailored
clothing, sportswear, outerwear, underwear, neckwear, dress shirts, casual pants, small leather goods,
belts, socks, jewelry, and luggage/briefcases. It also offers various women’s products, such as
sportswear, outerwear, swimwear, sleepwear, small leather goods, belts, sunglasses, prescription
eyewear, watches, jewelry, fragrance, and luggage. In addition, the company licenses its children’s
apparel. Kenneth Cole Productions markets its products to approximately 5,500 department and
specialty store locations, as well as through full-priced retail stores, outlet stores, and it’s e-commerce
Website. As of December 31, 2009, it operated 110 full-priced retail stores and outlets.
Page | 21
Polo Ralph Lauren Corp. (RL)
Polo Ralph Lauren Corporation, together with its subsidiaries, engages in the design, marketing, and
distribution of lifestyle products. The company offers men’s, women’s, and children’s clothing; and
accessories comprising footwear, eyewear, watches, jewelry, hats, and belts, as well as leather goods,
including handbags and luggage. It also provides products for homes, including bedding and bath
products, furniture, fabric and wallpaper, paint, tabletop, and giftware; and fragrance products for
women men. In addition, the company licenses many products. Polo Ralph Lauren sells its products to
department stores, specialty stores, and golf and pro shops; full-price retail stores, factory retail stores,
and concessions-based shop-within-shops; and online through RalphLauren.com and Rugby.com. As of
April 3, 2010, it operated 179 full-price retail stores and 171 factory stores worldwide, as well as 281
concessions-based shop-within-shops and 2 e-commerce Websites.
Tiffany & Co. (TIF)
Tiffany & Co., through its subsidiaries, engages in the design, manufacture, and retail of fine jewelry. The
company also offers TIFFANY & CO. brand merchandise, including timepieces and clocks; sterling silver
merchandise, including flatware, hollowware, trophies, key holders, picture frames, and desk
accessories; crystal, glassware, china, and other tableware; custom engraved stationery; writing
instruments; eyewear; leather goods; and fashion accessories.. The company serves its customers
through retail sales, Internet and catalog sales, business to business sales, and wholesale distribution
primarily in the Americas, the Asia-Pacific, and Europe. It also sells its products through TIFFANY & CO.
stores, as well as through department store boutiques in Japan. As of January 31, 2010, Tiffany & Co.
operated approximately 220 retail stores worldwide.
The Talbots Inc. (TLB)
The Talbots, Inc., together with its subsidiaries, operates as a specialty retailer and direct marketer of
women’s apparel, accessories, and shoes in the United States and Canada. It offers classic sportswear,
casual wear, dresses, coats, sweaters, accessories, and shoes in misses, petites, woman, and woman
petite sizes. The company also markets its products online through its Web site, talbots.com, as well as
through catalogs. As of January 30, 2010, it operated 580 stores under the Talbots brand name.
Williams-Sonoma Inc. (WSM)
Williams-Sonoma, Inc. operates as a specialty retailer of home products. It offers culinary and serving
equipment, including cookware, cookbooks, cutlery, informal dinnerware, glassware, table linens,
specialty foods, and cooking ingredients; and bridal and gift items under the Williams-Sonoma brand
name. The company also provides home furnishing categories, including furniture, textiles, decorative
accessories, lighting, and tabletop items under West Elm brand; bed and bath products under Pottery
Barn brand; and children’s furnishings and accessories under Pottery Barn Kids brand name. As of
January 31, 2010, it operated 610 retail stores, including 259 Williams-Sonoma, 199 Pottery Barn, 87
Pottery Barn Kids, 36 West Elm, 11 Williams-Sonoma Home, and 18 Outlet stores located in 44 states of
the United States; Washington, D.C.; Canada; and Puerto Rico, as well as six e-commerce websites.
Page | 22
Luxury Designers
LVMH MOET HENNESSY-UNSP ADR (LVMUY:OTC US)
LVMH Moet Hennessy Louis Vuitton SA is a France-based luxury goods company. The Company owns a
portfolio of luxury brands and its business activities are divided into five business groups: Wines and
Spirits, Perfumes and Cosmetics, Watches and Jewelry, Fashion and Leather Goods, and Selective
Retailing. The activities of the wines and spirits sector include the Champagne and Wines branch, and
the Cognac and Spirits branch. LVMH is present in the perfume and cosmetics sector with the French
Houses Christian Dior, Guerlain, Givenchy and Kenzo brands. The Fashion and Leather Goods business
group includes Louis Vuitton, Donna Karan, Fendi, Loewe, Celine, Kenzo, Marc Jacobs, Givenchy, Thomas
Pink, Pucci and Berluti. Watches and Jewelry sells products, such as TAG Heuer, Hublot, Zenith, Dior
Watches, Chaumet, Fred and De Beers. The Selective Retailing businesses operate in two segments:
travel retail and the selective retail concepts represented by Sephora and Le Bon Marche.
GUCCI GROUP NV-NY REG SHRS (GUCG:OTC US)
Gucci Group N.V. engages in the design, production, and distribution of personal luxury items. It
operates in four segments: Gucci Fashion and Accessories; Gucci Group Watches; Yves Saint Laurent;
and YSL Beaute. The company sells its products through directly operated stores, as well as through
franchise stores and points of sale in select duty free, department and specialty stores, worldwide.
Hermes International SCA (Euronext Paris: RMS-FR)
Hermes International SCA engages in the design, manufacturing, and marketing of luxury products. The
company offers several types of products, including leather goods, silk good and textiles, perfumes,
clocks, clothing and accessories, as well as tableware and others.
Most of the medians and means obtained were very similar, so the mean was used. However, in
situations where there were several outliers, a median was used for the valuation.
Page | 23
"Peer Group" Financials Comparison
LT M as of 21- A pr - 2011
A l l val ues i n mi l l i ons of U. S. Dol l ar , ex c ept per s har e i t ems .
Fiscal
Company Name
Coach, Inc. (COH)
Market Enterprise
Enterprise Value /
Price to
Price
Book
to
Price
to Gross Margin %
Period
Value
Value
EBIT
EBITDA
Value
Sales
EPS
LTM
12/2010
17,051.4
16,675.0
13.0x
11.8x
9.8x
4.44x
20.73x
73.3
Peer Summary Analysis
Mean
-
4,668.8
4,459.8
24.7x
9.2x
3.2x
1.37x
41.56x
48.6
Median
-
3,032.3
2,798.0
13.2x
9.6x
3.6x
1.12x
24.44x
48.3
Ann, Inc. (ANN)
01/2011
1,648.1
1,620.7
12.9x
7.3x
4.2x
0.93x
25.58x
55.8
Kenneth Cole Productions, Inc. (KCP)
12/2010
239.9
160.1
90.2x
14.2x
1.6x
0.53x
120.73x
40.8
Polo Ralph Lauren Corp. (RL)
12/2010
12,792.8
12,079.6
13.5x
11.2x
3.7x
2.34x
21.57x
58.8
Tiffany & Co. (TIF)
01/2011
8,531.3
8,540.3
14.3x
11.4x
3.9x
2.79x
23.29x
59.2
The Talbots, Inc. (TLB)
01/2011
384.5
383.0
6.0x
3.0x
2.1x
0.30x
35.22x
37.7
Williams-Sonoma, Inc. (WSM )
01/2011
4,416.6
3,975.3
11.5x
8.1x
3.5x
1.31x
22.97x
39.2
57.27
41.46
18.67
17.78
67.68
Peer Universe (6 comps)
Implied Coach Price
40.57
Average Implied Coach Price
"Absolute" Luxury Financials Comparison
LT M as of 21- A pr - 2011
A l l val ues i n mi l l i ons of U. S. Dol l ar , ex c ept per s har e i t ems .
Company Name
Coach, Inc. (COH-US)
Price to
Price
Book
to
to
Gross Margin %
EBITDA
Value
Sales
EPS
LTM
13.0x
11.8x
9.8x
4.44x
20.73x
73.3
Fiscal
Market
Enterprise
Period
Value
Value
EBIT
12/2010
17,051.4
16,675.0
Enterprise Value /
Price
Peer Summary Analysis
Mean
-
37,283.6
37,899.1
16.7x
11.9x
3.97x
3.62x
29.61x
63.3
Median
-
23,732.7
22,616.0
16.3x
9.0x
3.62x
3.09x
29.61x
62.9
Peer Universe (3 comps)
LVM H M oet Hennessy Louis Vuitton SA (LVM HF)
12/2010
85,049.6
87,993.1
10.7x
9.0x
3.62x
3.09x
20.72x
64.5
Hermes International SCA (525397)
12/2010
23,732.7
22,616.0
23.1x
20.2x
7.55x
6.76x
38.50x
62.7
Gucci Group NV (GUCG-US)
01/2004
3,068.6
3,088.2
16.3x
6.4x
0.73x
1.00x
-
62.9
72.09
56.92
23.33
42.83
82.02
Implied Coach Price
Average Implied Coach Price
55.44
Implied Coach Price Using M ultiples
46.52
The final implied price with weighting turned out to be $46.52. I believe the reason for this is that some
of Coach’s multiples, such as P/B and P/S are incredibly high and not really telling of the true value of
the stock.
Page | 24
DCF
Coach was found to have an intrinsic share value of $80.93 using a Discounted Cash Flow model. Many
steps, as detailed below, where taken to come to this final value.
The DCF analysis began with predicting future values for both the Income Statement and the Balance
Sheet. This was done by using a table as seen in the Appendix. Most of the line items were calculated as
a percentage of sales, then 3, 5, and 10 year averages were taken. Sales were calculated separately by
Coach U.S., Coach Japan, and Coach Other, which includes China among 20 other countries. Growth
rates were calculated for each of these and then total future revenues were predicted. Then the rest of
the line item predictions were applied as well. This produced an Income Statement, a Balance Sheet,
and a Statement of Cash Flows, for both the previous ten years, and the next five.
After the financial statements were calculated, free cash flows were calculated. FCF were calculated by
taking net income, adding back depreciation, subtracting net working capital, and subtracting capital
expenditures. Then, predictions for the next 20 years were made using those line items over sales,
averaging them for 3, 5, and 10 years, and making a common sense judgment for future growth.
Afterwards, the present value of the future FCF was calculated by discounting by the cost of equity. The
cost of equity was used because of the miniscule amount of debt that Coach has compared to its equity.
Then a terminal value was found and present value was taken by once again discounting by the future
growth rate, 5.5%. The total intrinsic value was found by adding the sum of the present value of the
future FCF to the present value of the terminal value. In order to find the total intrinsic value per share,
the total intrinsic value was divided by the total number of shares, and a value of $80.93 was attained.
DCF
Net Income
+ Depreciation
- Net Working Capital
- Capital Expenditures
Free Cash Flows
2001
2002
64568.74
24,131
-98
31900
56897.74
Sum (PV of FCF)
Terminal Value
PV of Terminal Value
5481702.26
31526110.37
18456349.06
Total Intrinsic Value
23938051.32
Total Intrinsic Value Per Share
2011E
DCF
759591.52
Net Income
138808.7985
+ Depreciation
154507.4126
- Net Working Capital
Free Cash Flows
2004
2005
2006
2007
2008
2009
2010
141560.81 256214.70 388968.64 495223.32
672464.20
741597.83 599556.90
30,231
42,854
50,400
65,115
80,887
100,704
123,014
160586
237896
-91804
164572
701147
-401022
28480
57100
67700
94600
133900
140900
174700
240300
-45894.19
-6527.30 436572.64 261866.32
-88695.80
1068623.83 453790.90
708543.44
126,744
-163152
81100
917339.44
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
472025.5125
598580.191
576918.9849 555982.28 517801.96 567506.792 567135.5243
556459.6907 545984.82
523306.5024
PV of FCF
-Cap Ex
2003
81756.74
25,494
82911
42800
-18460.26
g
Cost of Equity
5.50%
10.07%
80.93
2012E
813305.02
2013E
871504.72
2014E
934953.08
2015E
2016E
2017E
2018E
2019E
2020E
974170.48 1071587.52 1178746.28 1273045.98
1374889.66
1450508.59
160300.072 185857.4897 216232.848 250279.287 36005.341 39605.8749 42774.3449
46196.29245
48737.08853
178429.246 206877.0868 240687.753 278584.682 40077.373 44085.1107 47611.9196
224324.9332 69945.2187 81096.92431 94350.8864 109206.685 58187.203 64005.9228 69126.3966
519567.97 725230.62
769388.20 816147.29 836658.40 1009328.29 1110261.12 1199082.01
51420.87314
74656.50833
1295008.57
54249.02116
78762.61629
1366234.04
In order to calculate the cost of equity, first a beta was found by calculating the covariance of S&P500
returns with Coach returns and dividing by the variance of S&P500 returns. Betas were calculated for 1,
3, 5, and 10 years, and then an average was taken. A risk-free rate of 3.58% was used, along with a
Page | 25
market risk premium of 4.40%. CAPM was then used to find the cost of equity. The table below details
these numbers.
Cost of Equity
Beta
1.475
Risk-free rate
3.58%
Market risk premium
4.40%
Cost of equity
10.07%
Combining the multiples valuation weighted at 30% and the DCF weighted at 70% because much more
information went into it, an intrinsic stock value of $70.61 is attained, which is about $13 more than its
current stock price of $57.08.
Page | 26
Appendix
Income Statement
INCOME STATEMENT
Revenue
Coach U.S.
-% increase
Coach Japan
-% increase
Other
-% increase
-Total % increase
В В - Cost of Revenue
-COGS % of Revenue
Gross Profit
В В - Operating Expenses
Operating Income
В В + Interest Income, net
Pretax Income
В В - Income Tax Expense
Income Before XO Items
В В - Minority Interests, net of tax
Income From Cont. Ops.
+ Income From Disc. Ops., net of tax
Net Income
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
600,491
719,403
953,226 1,321,106 1,710,423
2,035,085
2,612,456
3,180,757 3,230,468
3,607,636
4,131,214
4,770,835
5,531,473
6,435,501
7,448,788
528,585
590,237
735,890
982,668 1,253,170
1,497,869
1,996,129
2,382,899 2,318,602
2,534,372
2,838,497
3,179,116
3,528,819
3,916,989
4,308,688
12%
25%
34%
28%
20%
33%
19%
-3%
9%
12%
12%
11%
11%
10%
40,861
95,702
177,821
278,011
372,326
420,509
492,748
605,523
670,103
720,860
764,112
825,241
891,260
962,561
1,039,565
134%
86%
56%
34%
13%
17%
23%
11%
8%
6%
8%
8%
8%
8%
31,045
33,464
39,515
60,427
84,927
116,707
123,579
192,335
241,763
352,404
528,606
766,479
1,111,394
1,555,952
2,100,535
8%
18%
53%
41%
37%
6%
56%
26%
46%
50%
45%
45%
40%
35%
20%
33%
39%
29%
19%
28%
22%
2%
12%
15%
15%
16%
16%
16%
218,507
236,041
275,797
331,024
384,153
453,518
589,470
773,654
907,858
973,945
1115428
1288126
1493498
1737585
2011173
36%
33%
29%
25%
22%
22%
23%
24%
28%
27%
27%
27%
27%
27%
27%
381,984
483,362
677,429
990,082 1,326,270
1,581,567
2,022,986
2,407,103 2,322,610
2,633,691
3,015,786
3,482,710
4,037,975
4,697,916
5,437,615
275,727
346,354
433,667
545,617
731,891
866,860
1,029,589
1,259,974 1,350,697
1,483,520
1795059.2 2172021.632
2628146.175 3180056.871 3847868.814
106,257
137,008
243,762
444,465
594,379
714,707
993,397
1,147,129
971,913
1,150,171
1,220,727
1,310,688
1,409,829
1,517,859
1,589,747
-305
-825
-1,754
-4,000
15,760
32,623
41,273
47,820
5,168
1,757
13751.7
13751.7
13751.7
13751.7
13751.7
101,205
128,434
233,807
429,871
596,622
728,505
1,011,486
1,162,354
939,744
1,110,570
1,190,582
1,274,773
1,365,995
1,465,444
1,526,913
35,400
47,325
90,585
167,866
201,132
283,490
398,141
411,910
353,712
416,988 495745.7088 572500.2558
663776.749 772260.1714
893854.596
64568.74 81940.74 149168.81
274257.7 380644.64 464786.3189 645328.1994 741581.832
599556.9 708543.4393 759591.5166 813305.0173
871504.7221 934953.0783 974170.4759
184
7,608
18,043
13,641
64568.74 81756.74 141560.81 256214.70 367003.64
464786.32
645328.20 741581.83 599556.90
708543.44
759591.52
813305.02
871504.72
934953.08
974170.48
21,965
30,437
27,136
16
64568.74 81756.74 141560.81 256214.70 388968.64
495223.32
672464.20 741597.83 599556.90
708543.44
759591.52
813305.02
871504.72
934953.08
974170.48
Balance Sheet
BALANCE SHEET
Assets
В В + Cash & Cash Equivalents
+ Surplus Cash
В В + Short-Term Investments
В В + Accounts & Notes Receivable
В В + Inventories
+ Deferred Income Taxes
+ Prepaid Expenses
В В + Other Current Assets
Total Current Assets
В В + LT Investments & LT Receivables
В В + Net PPE
+ Goodwill
+ Intangible Assets
+ Deferred Income Taxes
В В + Other Long-Term Assets
Total Long-Term Assets
Total Assets
Liabilities & Shareholders' Equity
В В + Accounts Payable
В В + Accrued Liabilities
+ Revolving Credit Facilties
В В + Current Portion of LT Debt
Total Current Liabilities
В В + Long-Term Borrowings
+ Deferred Income Taxes
В В + Other Long-Term Liabilities
Total Long-Term Liabilities
Total Liabilities
В В + Total Preferred Equity
В В + Minority Interest
В В + Share Capital & APIC
+ Accu. Other Compre. Income
В В + Retained Earnings & Other Equity
Total Equity
Total Liabilities & Equity
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
3,691
93,962
229,176
262,720
154,566
143,388
556,956
698,905
800,362
596,470
20,608
105,162
13,921
8,185
30,925
136,404
14,123
12,174
35,470
143,807
21,264
18,821
171,723
55,724
161,913
34,521
19,015
228,485
65,399
184,419
50,820
25,671
394,177
84,361
233,494
78,019
41,043
151,567
287,588
90,589
13,006
9,389
25,031
14,968
152,983
440,571
705,616
130,000
148,524
13,605
9,788
21,125
323,042
1,028,658
709,360
122,065
203,862
238,711
9,788
31,520
31,826
637,772
1,347,132
974,482
72,388
4,924
9,389
19,061
1,382
107,144
258,711
448,538
118,547
13,009
9,389
9,112
19,057
169,114
617,652
298,531
227,811
12,007
84,077
29,612
652,038
1,626,520
628,860
107,814
291,192
68,305
16,140
70,929
1,740,196
368,461
225,659
106,738
345,493
69,557
65,569
99,447
1,385,709
8,000
464,226
258,906
86,046
29,150
709,316
2,449,512
81,346
75,657
888,135
2,273,844
108,707
326,148
49,476
48,342
63,374
1,396,409
6,000
592,982
283,387
9,788
159,092
116,678
1,167,927
2,564,336
99,928
109,068
363,285
77,355
30,375
26,160
1,302,641
6,000
548,474
305,861
9,788
156,465
137,886
1,164,474
2,467,115
14,313
82,390
7,700
45
104,448
3,690
25,819
99,365
34,169
75
159,428
3,615
14,547
2,625
20,787
180,215
184
155,403
215
104,554
260356
440,571
26,637
108,273
26,471
80
161,461
3,535
25,727
29,262
190,723
7,608
214,484
-7,097
211,934
426929
617,652
44,771
135,353
1,699
115
181,938
3,420
15,791
45,223
64,434
246,372
18,043
357,026
-7,097
414,314
782286
1,028,658
64,985
185,502
15,143
150
265,780
3,270
4,512
40,794
48,576
314,356
13,641
465,015
-12,164
566,284
1032776
1,347,132
79,819
261,835
109,309
298,452
134,726
315,930
170
341,824
3,100
31,655
61,207
95,962
437,786
775,209
-7,260
420,785
1188734
1,626,520
235
407,996
2,865
36,448
91,849
131,162
539,158
978,664
-12,792
944,482
1910354
2,449,512
285
450,941
2,580
26,417
278,086
307,083
758,024
1,115,041
21,463
379,316
1515820
2,273,844
103,029
348,619
7,496
508
459,652
25,072
105,569
422,725
742
529,036
24,159
383,570
408,642
868,294
1,189,060
3,851
503,131
1696042
2,564,336
408,627
432,786
961,822
1,502,982
29,395
-27,084
1505293
2,467,115
2,259
5,949
110,397
125,277
-487
23,524
148314
258,711
2012E
2013E
2014E
1106294.582 1287100.286
164,904.40 222,536.78
2015E
826242.848
43,667.40
954167.093
73,929.47
1489757.66
305,734.42
136330.0699
433777.4952
82624.2848
61968.2136
82624.2848
1,667,235
8262.42848
660994.2784
305,861
6196.82136
156986.1411
123936.4272
1,262,237
2,929,472
157437.5703
500937.7238
95416.7093
71562.53197
95416.7093
1,948,868
9541.67093
763333.6744
305,861
7156.253197
181291.7477
143125.0639
1,410,309
3,359,177
182538.606
580804.6553
110629.4582
82972.09362
110629.4582
2,338,773
11062.94582
885035.6653
305,861
8297.209362
210195.9705
165944.1872
1,586,397
3,925,170
212371.5471
675727.65
128710.0286
96532.52142
128710.0286
2,751,689
12871.00286
1029680.229
305,861
9653.252142
244549.0543
193065.0428
1,795,680
4,547,368
245810.0139
782122.7715
148975.766
111731.8245
148975.766
3,233,108
14897.5766
1191806.128
305,861
11173.18245
283053.9554
223463.649
2,030,255
5,263,364
144592.4984
454433.5664
4131.21424
440.7997667
603,598
12393.64272
0
404858.9955
417,253
1,020,851
1528549.269
8,262
541,503
2078315.131
3,099,166
166979.2413
500937.7238
4770.835465
509.0472286
673,197
14312.50639
0
467541.8756
481,854
1,155,051
1765209.122
9,542
1,149,229
2923979.684
4,079,031
193601.5518
580804.6553
5531.472908
590.2070978
780,528
16594.41872
0
542084.345
558,679
1,339,207
2046644.976
13,829
1,799,466
3859939.984
5,199,147
225242.55
656421.1457
6435.501428
686.6667675
888,786
19306.50428
0
630679.14
649,986
1,538,772
2381135.528
16,089
2,496,267
4893491.545
6,432,263
260707.5905
759776.4066
7448.7883
794.7842823
1,028,728
22346.3649
0
729981.2534
752,328
1,781,055
2756051.671
18,622
3,214,112
5988785.905
7,769,841
Page | 27
Inputs
INPUTS:
Revenue Growth (y-o-y)
COGS/Sales
Operating Expenses/Sales
Interest Expense/Debt
Income Tax Expense/Sales
2001
36%
46%
4.3%
5.9%
2002
20%
33%
48%
4.3%
6.6%
2003
33%
29%
45%
4.3%
9.5%
2004
39%
25%
41%
4.3%
12.7%
2005
29%
22%
43%
4.3%
11.8%
2006
19%
22%
43%
4.3%
13.9%
2007
28%
23%
39%
4.3%
15.2%
2008
22%
24%
40%
4.3%
13.0%
Cash/Sales
AR/Sales
Inventories/Sales
Deferred Income Taxes/Sales
Prepaid Expenses/Sales
Other CA/Sales
LT Investments & LT Receivables/Sales
Net PPE/Sales
Goodwill/Sales
Intangible Assets/Sales
Deferred LT Income Taxes/Sales
Other Long-Term Assets/Sales
Accounts Payable/Sales
Accrued Liabilities/Sales
Revolving Credit Facilties/Sales
Current Portion of LT Debt/Sales
Long-Term Borrowings/Sales
Deferred Income Taxes/Sales
Other Long-Term Liabilities/Sales
Share Capital & APIC/Sales
Accu. Other Compre. Income/Sales
Retained Earnings & Other Equity/Sales
0.61%
3.43%
17.51%
2.32%
1.36%
0.00%
0.00%
12.05%
0.82%
1.56%
3.17%
0.23%
2.38%
13.72%
1.28%
0.01%
0.61%
0.00%
0.38%
20.86%
-0.08%
3.92%
13.06%
4.30%
18.96%
1.96%
1.69%
0.00%
0.00%
12.59%
1.81%
1.31%
3.48%
2.08%
3.59%
13.81%
4.75%
0.01%
0.50%
2.02%
0.36%
21.60%
0.03%
14.53%
24.04%
3.72%
15.09%
2.23%
1.97%
0.00%
0.00%
12.44%
1.36%
0.98%
0.96%
2.00%
2.79%
11.36%
2.78%
0.01%
0.37%
0.00%
2.70%
22.50%
-0.74%
22.23%
19.89%
4.22%
12.26%
2.61%
1.44%
0.00%
9.84%
11.24%
1.03%
0.74%
0.00%
1.60%
3.39%
10.25%
0.13%
0.01%
0.26%
1.20%
3.42%
27.02%
-0.54%
31.36%
9.04%
3.82%
10.78%
2.97%
1.50%
0.00%
7.14%
11.92%
13.96%
0.57%
1.84%
1.86%
3.80%
10.85%
0.89%
0.01%
0.19%
0.26%
2.39%
27.19%
-0.71%
33.11%
7.05%
4.15%
11.47%
3.83%
2.02%
0.00%
0.00%
14.67%
11.19%
0.59%
4.13%
1.46%
3.92%
12.87%
0.00%
0.01%
0.15%
1.56%
3.01%
38.09%
-0.36%
20.68%
21.32%
4.13%
11.15%
2.61%
0.62%
2.72%
0.00%
14.10%
8.64%
0.00%
3.29%
1.12%
4.18%
11.42%
0.00%
0.01%
0.11%
1.40%
3.52%
37.46%
-0.49%
36.15%
3.20%
0.01%
3.40%
-4.88%
-1.13%
-0.72%
0.94%
-2.41%
-0.30%
0.95%
0.73%
7.13%
31.25%
3.10%
0.07%
2.17%
-2.49%
0.25%
-0.21%
0.97%
-2.21%
-1.28%
1.16%
1.13%
3.69%
32.10%
Depreciation and amortization
Provision for bad debt
Share-based compensation
Excess tax (benefit) deficit from share-based compensation
Deferred income taxes
Other noncash (charges) and credits, net
Decrease in trade accounts receivable
(Increase) decrease in inventories
Decrease (increase) in other assets
Increase in other liabilities
Increase (decrease) in accounts payable
Increase (decrease) in accrued liabilities
Net cash provided by operating activities
2009
2%
28%
42%
4.3%
10.9%
2010
12%
27%
41%
4.3%
11.6%
3-yr Ave.
11.7%
26.5%
40.8%
4.3%
11.8%
5-yr Ave.
16.5%
24.9%
40.9%
4.3%
12.9%
10-yr Ave.
22.5%
25.9%
42.5%
4.3%
11.7%
2011E
12.0%
27.0%
40.0%
4.3%
12.0%
2012E
15.0%
27.0%
40.0%
4.3%
12.0%
2013E
17.0%
27.0%
40.0%
4.3%
12.0%
2014E
15.0%
27.0%
40.0%
4.3%
12.0%
2015E
15.0%
27.0%
40.0%
4.3%
12.0%
21.97%
3.36%
10.86%
2.19%
2.06%
3.13%
0.25%
14.59%
8.14%
0.00%
2.56%
2.38%
4.24%
9.93%
0.00%
0.01%
0.08%
0.83%
8.74%
35.06%
0.67%
11.93%
24.78%
3.37%
10.10%
1.53%
1.50%
1.96%
0.19%
18.36%
8.77%
0.30%
4.92%
3.61%
3.19%
10.79%
0.23%
0.02%
0.78%
0.00%
11.87%
36.81%
0.12%
15.57%
16.53%
3.02%
10.07%
2.14%
0.84%
0.73%
0.17%
15.20%
8.48%
0.27%
4.34%
3.82%
2.93%
11.72%
0.00%
0.02%
0.67%
0.00%
11.33%
41.66%
0.81%
-0.75%
21.09%
3.25%
10.34%
1.95%
1.47%
1.94%
0.20%
16.05%
8.46%
0.19%
3.94%
3.27%
3.45%
10.81%
0.08%
0.02%
0.51%
0.28%
10.65%
37.84%
0.54%
8.92%
18.33%
3.60%
10.73%
2.46%
1.41%
2.13%
0.15%
15.56%
8.51%
0.14%
3.78%
2.73%
3.69%
11.35%
0.05%
0.01%
0.36%
0.76%
7.69%
37.82%
0.15%
16.72%
15.83%
3.75%
12.82%
2.44%
1.50%
2.13%
0.15%
15.56%
8.51%
0.14%
3.78%
2.73%
3.44%
11.67%
1.01%
0.01%
0.29%
0.73%
4.77%
30.83%
-0.13%
18.87%
20.00%
3.30%
10.50%
2.00%
1.50%
2.00%
0.20%
16.00%
8.50%
0.15%
3.80%
3.00%
3.50%
11.00%
0.10%
0.01%
0.30%
0.00%
9.80%
37.00%
0.20%
9.00%
20.00%
3.30%
10.50%
2.00%
1.50%
2.00%
0.20%
16.00%
8.50%
0.15%
3.80%
3.00%
3.50%
10.50%
0.10%
0.01%
0.30%
0.00%
9.80%
37.00%
0.20%
9.00%
20.00%
3.30%
10.50%
2.00%
1.50%
2.00%
0.20%
16.00%
8.50%
0.15%
3.80%
3.00%
3.50%
10.50%
0.10%
0.01%
0.30%
0.00%
9.80%
37.00%
0.25%
9.50%
20.00%
3.30%
10.50%
2.00%
1.50%
2.00%
0.20%
16.00%
8.50%
0.15%
3.80%
3.00%
3.50%
10.20%
0.10%
0.01%
0.30%
0.00%
9.80%
37.00%
0.25%
9.50%
20.00%
3.30%
10.50%
2.00%
1.50%
2.00%
0.20%
16.00%
8.50%
0.15%
3.80%
3.00%
3.50%
10.20%
0.10%
0.01%
0.30%
0.00%
9.80%
37.00%
0.25%
9.50%
3.17%
0.01%
2.11%
-0.73%
-0.53%
0.22%
0.26%
-1.01%
-2.97%
0.90%
0.64%
2.36%
27.73%
3.81%
0.03%
2.09%
0.03%
0.42%
0.31%
0.10%
0.13%
0.96%
0.01%
-1.15%
-0.99%
24.31%
3.51%
-0.02%
2.26%
-0.77%
-0.47%
-0.29%
0.12%
-0.94%
0.99%
0.79%
0.03%
1.89%
26.73%
3.50%
0.01%
2.15%
-0.49%
-0.19%
0.08%
0.16%
-0.61%
-0.34%
0.56%
-0.16%
1.08%
26.26%
3.36%
0.02%
2.40%
-1.77%
-0.29%
-0.14%
0.48%
-1.29%
-0.52%
0.76%
0.28%
2.81%
28.42%
3.40%
0.01%
2.20%
-1.00%
-0.25%
-0.10%
0.20%
-1.00%
-0.40%
0.60%
0.28%
2.00%
27.00%
3.40%
0.01%
2.20%
-1.00%
-0.25%
-0.10%
0.20%
-1.00%
-0.40%
0.60%
0.28%
2.00%
27.00%
3.40%
0.01%
2.20%
-1.00%
-0.25%
-0.10%
0.20%
-1.00%
-0.40%
0.60%
0.28%
2.00%
28.00%
3.40%
0.01%
2.20%
-1.00%
-0.25%
-0.10%
0.20%
-1.00%
-0.40%
0.60%
0.28%
2.00%
28.00%
3.40%
0.01%
2.20%
-1.00%
-0.25%
-0.10%
0.20%
-1.00%
-0.40%
0.60%
0.28%
2.00%
28.00%
Relevant Metrics and Ratios
Relevant Metrics and Ratios
ROIC
ROE
D/(D+E)
Gross Profit Margin
Operating Profit Margin
Profit Margin
Cash Ratio
Quick Ratio
Current Ratio
Inventory Turnover Days
Accounts Payable Days
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
44.40%
41%
45.60%
38.50%
45.20%
29%
22%
17%
13%
10%
41.66%
35.20%
48.92%
35.35%
47.07%
36.55%
27.82%
22.58%
19.11%
16.27%
26.92%
22.01%
33.34%
33.86%
38.99%
32.94%
28.32%
25.76%
23.92%
22.92%
77.72%
77.44%
75.68%
71.90%
73.00%
73.00%
73.00%
73.00%
73.00%
73.00%
35.12%
38.03%
36.06%
30.09%
31.88%
29.55%
27.47%
25.49%
23.59%
21.34%
24.33%
25.74%
23.32%
18.56%
19.64%
18.39%
17.05%
15.76%
14.53%
13.08%
0.42
1.37
1.55
1.74
1.13
1.37
1.42
1.42
1.45
1.45
2.17
3.55
2.31
2.33
1.78
2.04
2.15
2.25
2.34
2.38
2.85
4.27
3.07
3.04
2.46
2.76
2.89
3.00
3.10
3.14
187.92
180.31
163.00
131.13
136.15
141.94
141.94
141.94
141.94
141.94
52.6
53.3
53.8
48.8
37.7
38.5
42.0
41.8
41.7
41.9
2001
Total Liabilities
110397
2002
180215
2003
190723
2004
246372
2005
314356
2006
2007
2008
2009
2010
437786
539158
758024
868294
961822
Total Current Assets
151567
287588
448538
705616
709360
974482
1740196
1385709
1396409
1302641
Total Current Liabilities
104448
159428
161461
181938
265780
341824
407996
450941
459652
529036
Working Capital to Debt
0.426814 0.711151 1.505204 2.125558 1.411075 1.445131
2.47089 1.233164 1.078848 0.804312
Depreciation
24131
25494
30231
42854
50400
65115
80887
100704
123014
126744
Capital Expenditures
31900
42800
57100
67700
94600
133900
140900
174700
240300
81100
Capital Expenditures to Depreciation
1.321951 1.678826
1.88879 1.579783 1.876984 2.056362 1.741936 1.734787 1.953436 0.639872
3-yr avg
5-yr avg
10-yr avg
1.038775 1.406469 1.3212146
1.442699 1.625279 1.6472728
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