Coach Could Become A 'House Of Modern Luxury'

Coach Inc COH has strengthened its position moving into the future, leading RBC analyst Brian Tunick to raise its price target from $45 to $50, and reiterated an Outperform rating.

The analyst raised the price target without even adjusting estimates to account Coach’s acquisition of Kate Spade & Co KATE, a move that analysts have been largely supportive of.

According the Tunick, the North American handbag market is at an inflection point, thanks to brand elevations initiatives including the Kate Spade acquisition and Michael Kors Holdings Ltd KORS’s Runway 2020 plan.

Market growth is expected to remain in the low-single digits, but Tunick points out that first quarter fiscal 2017 was the first in three years in which units sold were down but average unit selling price increased to drive growth.

Financial Outlook

“Financially, even baseline accretion assumptions look compelling,” said Tunick. His proforma combined model estimates $0.30–$0.40 accretion by fiscal 2018 due to:

• Low-single-digit revenue growth for Coach.
• High-single-digit growth for Kate Spade.
• EBIT margin growth for Coach by 330 basis points.
• Margin improvements for Kate beating the guided $50 million synergies.
• Total interest expenses of $70 million and a combined tax rate of 26 percent.

Shares of Coach are up 8.5 percent since the Kate acquisition was confirmed on May 8.

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