Investors in Coach Inc. are hitting the exits after the high-end handbag maker cautioned sales will be sluggish for the next nine months, as more women turn up their noses at the brand.
Coach shares fell by nearly 8 per cent on Tuesday after the company reported North American same-store sales, a key measure in the retail industry, fell 6.8 per cent in the quarter ended Sept. 28. It also warned same-store sales would drop by the "high single digits" during the rest of the financial year that ends June 2014.
Analysts are worried about Coach's prospects heading into the critical holiday-shopping season, as it continues to expand from handbags into clothing and shoes, and builds its men's business.
But the stock selloff may be an overreaction. Coach has essentially no debt and trades for 15 times earnings, a reasonable valuation, given its historically strong growth.
The company is expanding in China, where it saw revenues rise 35 per cent in the recent quarter, and it is counting on a recovery in Europe.
"While the company hasn't given investors much to cheer about for the next nine months, there are signs that the new lifestyle strategies are beginning to gain traction, as China trends remain strong and European expansion is in the very early stages," Morningstar analyst Paul Swinand said in a note Tuesday, calling Coach shares "undervalued."
"We don't see any major changes to our favourable long-term outlook," he said.
Coach's underwhelming recent performance is being blamed on its decision to offer more discount products, which hurts the cachet of its brand, as well as increased competition.
"We find the current product in stores to be less compelling, and we do not believe it is resonating as well with younger customers as competitor Michael Kors," Canaccord Genuity analyst Laura Champine said in a recent note, after placing a "hold" on the stock.
Cowen and Co., which recently did a focus group on the Coach brand, found that buyers thought the brand was overexposed and lacked "sizzle," associating it with political personalities such as Hillary Clinton and Condoleezza Rice.
"We are encouraged that Coach has a reservoir of goodwill among consumers, but our findings indicate that the company faces many challenges as it tries to turn the business around," said analyst Faye Landes in her report.
While a slow U.S. recovery and lagging growth in China have been challenges for luxury goods in general, consumers in the United States are showing a growing willingness to treat themselves with high-priced goods that make a fashion statement.
A survey released Tuesday by Deloitte LLP show U.S. shoppers expect to spend 9 per cent more on holiday gifts this year and that 54 per cent believe the economy is on the rebound.
"There's no evidence that people have lost their appetite for luxury," said Ms. Landes in an interview. "It's just a question of what kind of luxury and how much they want to pay for it."
Other high-end consumer stocks have been doing well. Handbag maker Michael Kors Holdings Ltd. and designer outerwear V.F. Corp. are both trading at or near record-highs.
Michael Kors' shares have jumped by about 50 per cent so far this year and are trading near their peak of $78 (U.S.) reached in September. In August, the company reported first-quarter same-store sales were up 27 per cent, while total revenues rose 55 per cent.
Shares of V.F. Corp., the company behind such high-margin labels as North Face, Timberland and Vans, hit their own record high on Monday after the company reported stronger-than-expected sales. It also announced a 4-for-1 stock split and hiked its quarterly dividend by 21 per cent.
"What we're seeing overall is that the U.S. consumer seems pretty resilient right now," the company's chief financial officer Robert Shearer told Reuters.