It wasn't long ago that Coach was the most scorned of the three affordably priced luxury handbag makers. Now, with it, Michael Kors and Kate Spade on deck to report their latest quarterly earnings results, the former laggard has emerged as a favorite among several Wall Street analysts.
With Coach's North America division expected to report its first quarterly comparable-sales gain in three years, analysts' expectations are high. The retailer's stock has received two upgrades in as many weeks, as Wall Street becomes more convinced that its turnaround is sustainable. Meanwhile, the label's shares are up nearly 35 percent over the past year, despite slipping nearly 4 percent toward $41 in trading Tuesday.
That doesn't mean investing in the leather goods maker is without risks. Overall sales trends in the handbag space remain muted, as the industry grapples with excess inventories and heightened promotions. Meanwhile, traffic at outlet centers — where Coach generates some 40 percent of its revenue — continues to be pressured by a slowdown in international tourism.
"Coach is the best-positioned company in the 'affordable luxury' accessory group," said Credit Suisse analyst Christian Buss, who upgraded the company's shares to "outperform" from "neutral" last week.
"We believe stabilization in Coach's core business, combined with a possible acquisition narrative could help drive significant, sustained earnings power long term," he said.
Coach's transformation has been marked by incremental victories along the way. After years of saturating the market with promotions and logo merchandise, the company ended a slog of quarterly revenue declines in January, when it said sales grew for the first time in more than two years. Yet analysts remained somewhat skeptical about a real turnaround, as much of that gain was tied to its acquisition of the Stuart Weitzman footwear brand.
But as Coach has regained some of its pricing power and snagged shelf space at higher-end retailers, analysts are likewise becoming more confident that its burgeoning rebound is sustainable.
Adding to their conviction is Coach's relatively small exposure to the heavily promotional department store space, which accounts for less than 5 percent of its sales, according to Wells Fargo. And late Monday, Coach announced the expected sale-leaseback of its new headquarters in New York City, representing a gain of $30 million. Analysts said a portion of that money could be used to fuel future acquisitions.
Wall Street expects Coach to post a 16 percent increase in revenue, to $1.17 billion, when it reports earnings next week, according to a consensus estimate from Thomson Reuters. Analysts predict earnings per share will rise 31 percent, to 41 cents a share.