Coach (NYSE:COH) recently reported earnings for the second quarter of fiscal 2015. Seasonally, this is the strongest quarter, and for that reason the most important in evaluating progress on the company’s transformation plan.
As discussed in my September 2014 article, management correctly diagnosed the company’s problems, noting the need to close under-performing stores, revitalize and update store formats, reduce excessive promotional activity, and provide styles more consistent with current fashion trends. The fiscal 2Q 2015 earnings conference call (transcript) provides a progress report, and is well worth reading. Among the achievements:
- Closed 53 stores to date, expect to reach 70 by year end
- Opened 20 new concept stores, which outperformed the rest of the fleet
- Closed 8 outlet stores
- Adopted industry standard semiannual sales model
- Reduced eOS flash sales from 3/week to 1/week, expects to reach 2/month by fiscal year end
There are concrete indications that the brand image is recovering. From the call:
In our quarterly brand tracking, we saw some positive indicators emerging, including improved perception of high quality among category driver consumers, lower perceptions of overall discounting amongst category drivers and positive movement in brand affinities among millennials.
In this situation, profits and margins are of less concern than trends in revenue and inventory. Excess inventory is a heavy burden, since selling it requires promotional activity and pricing, which can further cheapen the brand. From a revenue point of view, I’m looking for the company to stabilize at the 2011 level before resuming measured growth.
Quarterly inventory was computed as a percentage of quarterly revenue over a period of several years. In addition to comparing data for the same quarter, inventory was also compared to revenue in the subsequent quarter, since that is indicative of inventory control.
As of December 2014, ending inventory was 36.7% of revenue, compared to 38.9% and 32.8% for December 2013 and 2012. I see an improvement, with room for more.
On a forward-looking basis, inventory was 39.8% of the subsequent quarter in September 2012, a figure that steadily increased to as high as 51.4% in March 2014. That is the measure of inventory overhang.
Improvement from that high point has been steady but not rapid. For September 2014 it stood at 49.0%, and I project it to come down to 47.4% for December 2014. That’s based on projected sales of $942 million for the quarter ending March 2015. I regard the improvement in inventory overhang as acceptable, given the large reduction in promotional activity.
Looking at revenue, the 2nd fiscal quarter averages 29.9% of the annual, with the 1st coming in at 22.5%, and the 3rd and 4th at 23.1% and 24.5%. Projecting on that basis, full year revenue will be $4,201 million, or 1% more than 2011. That’s consistent with my hypothetical recovery scenario.
Seasonal Share Price Trends
Coach has a definite seasonality in its share price. Briefly, it does well in the 1st and 4th calendar quarters. If you have an account with Schwab, it’s a good idea to look up the Ned Davis Seasonality report, which gives you a chart.
After studying the chart, I don’t expect much further improvement in Coach’s share price until the 4th quarter. With that in mind, I sold covered calls at 40, to expire in August, receiving $1.90 in premium.
Using the seasonal patterns observed for revenue, I have developed projections for the next two quarters. As earnings come out, I plan to compare actual revenue to projections. In addition, inventory needs to be analyzed as discussed above, to track progress on reducing the overhang.
As of the most recent earnings report, Coach is on target with its transformation. I plan to review progress on a quarterly basis, and to hold my existing position as long as the company stays on a track that is consistent with my recovery scenario.
According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, blogger Tom Armistead has a total average return of 13.3% and a 75% success rate. Tom Armistead is Ranked #275 out of 4200 Bloggers