On Monday, the investor community was introduced to the first fall collection from new executive creative director Stuart Vevers, culminating a week of meetings with fashion news media and wholesale accounts. This marked Coach’s firstever presentation at New York Fashion Week, and importantly, the collection was critical to achieving buy-in from the fashion media, which we believe was achieved. We believe Mr. Vevers’s previous roles as creative director at LVMH’s Loewe and Mulberry as well, his other work at Bottega Veneta and Luella Bartley, and also his creative vision make him well suited to restore Coach’s fashion integrity. It was evident from the universally favorable reviews that he has earned the respect of the fashion media over time and with this new collection.
In our view, Mr. Vevers did a solid job of creating a younger, more contemporary yet wearable ready-to-wear collection that ties to the more universal “core” handbag pieces, creating a good blend of old and new. As expected, outerwear (shearling) and upgraded fashion footwear (shearling-lined, rubber-soled wedge boots) were key components of the new collection that generated buzz. The fall collection will contain 90 handbag SKUs (down 20%-30%) and will be categorized by core (50%), downtown (20%), uptown (20%) and play (10%). The “play” category is intended to include fast-moving, limited edition products that bring added excitement to the collection. Logo will continue to be de-emphasized, a continuation from the recent quarter in which logo penetration at full price fell to 11% versus 23% last year—at Coach Factory, logo penetration fell to 42% versus 57% last year. Handbag price points remain intact on the core collection (roughly $300), yet higher-price-point collection items that elevate the brand still present an opportunity. Notably, the collection items will be housed in 25-30 stores and online (and are thus unlikely to meaningfully move the needle), but more importantly, they are meant to create a halo effect that will permeate other brand categories.
Step one of the multi-year lifestyle brand transformation was to hire a world-class creative director to create a collection applauded by the fashion media. We believe Mr. Vevers achieved this goal with a more contemporary, relevant collection offering select, higher-price-point items while staying true to the brand’s heritage and opening price points. While Coach delivered disappointing holiday results, we believe the company is poised to redefine its market-leading position over the next several years within an evolving handbag and accessory market. In addition, we believe Coach has numerous other growth levers, including men’s, international, and e-commerce. Shares of Coach are trading at 15 times our fiscal 2014 EPS estimate and 13 times our fiscal 2015 EPS estimate. With still-solid brand equity, $1 billion in projected free cash flow in 2014 (7% yield), and $700 million in targeted share repurchases this year, Coach remains a compelling value for long-term investors, in our view, with its next true test to come with customer reception to the new collection in the fall.
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