Professional Documents
Culture Documents
Team4
- Marga Manzo
- Cecilia Xu Liu
- Prashant Khorana
- Dushyanth Damodaran
- Shun Ito
Executive Summary
We recommend that LEAPORD should GO AHEAD with the deal. Coach undervalued, and now is the
time to capitalize on this excellent opportunity
Coach is a compounder, not a typical fad or quick-to-die scheme, with a long history of reinventing
itself
Over the past decade, the company's sales increased at a compound annual rate of 21.1%, while
earnings per share grew 31.1%. But recently, the stock price has slid 37%YTD while the S&P 500 has
generated a +6.5% YTD return
Coach currently trades at 6.8 x EBITDA and 12.6x forward price to earnings. If we assume that Coach
ultimately trades towards its average forward multiple of 15.5x over the next three years(and closer to
the peer median of 11.8x EBITDA), the purchase will be $56.26
We believe that the short-term pessimism is merely consumer irrationality and social proof - where
the market is punishing a long-term term product-centric innovator. Our investment thesis is grounded on
the the belief that Coach will continue to establish itself as an affordable luxury leader, and will continue
to expand its presence internationally
The structure will essentially comprise of financing from FOSUN for the bulk of sponsors equity; the
leverage will be 7x Debt to EBITDA. The Exit IRR will be 20%~ at a multiple 11x same as entry multiple
6,000
5,000
4,763
5,075
80.0%
4,806
70.0%
60.0%
4,000
50.0%
40.0%
3,000
30.0%
20.0%
2,000
10.0%
1,000
0.0%
06/2012
0
06/2012
06/2013
06/2014
Other
International
North America
North America
International
06/2014
Other
06/2013
Growth Story
Over a decade ago, Coachs top and bottom lines took a hit as its styles missed the mark. Sales slowed
in the mid-to-late 1990s as both high-end designers and lower-end rivals muscled onto its turf. But in
1996, Lew Frankfort hired Reed Krakoff from Tommy Hilfiger, and what followed is history as the two
refocused the company, bringing in new styles, collections and fabrics
Coach is the embodiment of affordable luxury a coveted brand at prices a third lower than high end
peers
In recent years, Coach has successfully made handbags the shoes of womens wardrobes. American
women, it seems, are finally learning what Parisian women have known for decades: Accessories make
the outfit. American women are finally starting to see the handbag as the shoes in their wardrobe.
We believe mens category sales could hit $1 billion in the next few years. Men are more likely these
days to move into non-tradational luxury categores(i.e. instead of just watches, wallets, to luxury
briefcases/work bags etc.)
Looking to Japan as a guide, where market share has grown from 2% - 3% in the 1990s to 17% today,
there is plenty of room for Coach to take share of the global luxury goods market. We see obvious
parallels to the companys opportunity in China today, with current market share estimated at 5% and
growing
Market Overview
Based on Euro-monitor (see graph below) the Chinese consumer market of Luxury is about to surpass the US
Market with a CAGR of 11%
The rising Chinese middle class will continue to provide a long-term middle catalyst to our investment thesis
The total worldwide luxury goods market is expected to compound 4% to 6% annually reaching sales of $327
billion through 2015 (Bain & Company: Luxury Market Whitepaper)
Growth is largely driven by China, expansion into mens categories and greater online distribution and sales
(CAGR of 12%, highest in the world; see Euro-monitor Luxury report)
Competitive Overview
Burberry - an iconic affordable luxury brand that is over 100 years old - eclipsed $400m in sales 2001.The
Company will surpass $4bn in March 2017. It has taken Burberry, roughly 16 years to go from $400m to $4bn
in sales. But thats typical - Ralph Lauren took at least 15 years. Coach: 16 years. Hermes: 22 years, and
Tiffany's: 25 years. Like Mark Twain said History doesnt repeat itself, but it sure does rhyme. We believe
that new and fast growing competitors havent faced the challenge of re-inventing themselves yet
Risks
International Strategy
Coachs long-term growth strategy, and multi-year turn around plan relies heavily on its plan to expand
internationally. If the Chinese double-digit growth assumption doesnt realize, the plan might fall apart.
Furthermore, the assumption of expanding in Europe relies on the assumption that customers will buy-in to the
idea of affordable luxury.
China growth risk
Our Concern about Chinas economy, is one that is shared by many forecasters. With an overheated realestate economy, and poor transparency, its difficult to forecast if the double-digit growth will remain stable.
Margin Compression
Coach continues to expand into non-traditional categories for both men and women but margins are generally
lower in these categories. The companys pricing power remains strong, but margins could compress if nontraditional categories grow at faster rates.
Brand Erosion
If management stretches too far with its transformation plan, they risk diluting their brand and damaging the
core business. Re-inventing the company brand is not an easy task.
Competition
Coach benefits from unparalleled brand loyalty, but new entrants are attacking the incumbents niche every day.
Management has done a tremendous job reinventing itself over the decades and it will have to continue to do
so to maintain leadership in the industry.
Preliminary Valuation
DRAFT
Message box
Valuation
30.00
40.00
45.00
50.00
55.00
60.00
65.00
Premium
58.0%
3 months
6 months
12 months
FV/EBITDA
FV/EBIT
Market
Cap
Enterprise
Value
Revenue
Gross
Margin
EBITDA
Margin
9,600
8,871
4,806
68.6%
27.2%
0.1
12.6
6.8
1,109.3
D/E
P/E
EV/
EBITDA
1,111,818
1,111,411
3,984
71.2%
25.2%
0.1
20.3
88,992
94,495
40,424
65.4%
24.6%
0.2
19.1
9.5
15,500
14,545
3,589
61.0%
32.9%
0.0
21.1
12.3
14,600
13,615
7,505
57.9%
18.0%
0.1
20.1
10.1
PVH Corp.
10,000
13,377
8,251
52.5%
11.1%
0.9
31.7
14.7
3,400
3,664
1,419
57.1%
1.2%
-12.3
50.5
215.5
Tod's Group
3,400
3,231
1,306
38.3%
21.6%
0.1
23.5
11.5
Guess
1,900
1,392
2,513
36.7%
11.0%
0.0
15.2
5.0
Median
20.7
11.9
Mean
25.2
10.5
EV/
EBIT
Capital structure
Structure
(Answer to Q6, Q9)
Return Analysis
IRR sensitivity
(Answer to Q7)
Exit strategy
IPO
Gain capital gain after the
IPO if we hold some portion
of the stake
If investor appetite is good,
IPO price can be almost
equal to the selling price in
trade sale
Hard to exit one time,
considering the size of the
company
IPO price will be usually
lower than the selling price
in trade sale
When the recession hit, sales grew higher in 2009, while profit dipped single digits. Competitors all had to
take markdowns - the rest of the Luxury index saw sales fall mid-single digits and earnings slashed by a
third. Thus, even during bad times, Coach's fundamentals were excellent, with margins at 30%~ and free
cash flow generation greater than 20%~ of revenue
Victor Luis, the current president of the international group, becoming CEO in January 2014. We also think
the promotion confirms the companys focus on international growth as the primary driver of returns over the
long run
Coach has little debt on the balance sheet and $835.9 million of net cash on hand, or roughly $3 per share,
leaving the company in a formidable position to fund future investment