We’re surprised that the market is glossing over Coach’s 8k about how it will be changing its reporting structure from retail/wholesale to Geographic regions. Coach is at a crossroads, and with the top line relying on new product categories and consumers (ie men) it needs to show the investment community more disclosure (which it has traditionally been very good about) rather than less.
We’ve got a mixed read on this. On one hand, companies don’t change up their reporting structure because business is ‘just trending so darn well’ -- ever. Restructuring makes modeling over the next four quarters very difficult, and it gives a management team plenty of opacity to hide behind if results fall short. Wall street usually sees through this.
On the flip side, we’re not suggesting a conspiracy theory here. Most restructuring structure events a) come at the request of independent auditors, b) are required to ensure that external financial reporting matches perfectly with internal business operational reporting. Coach is going more global, so it makes sense to report as such.
But even if 100% legit, it does not change the fact that it opens the door for the company to back off it’s prior disclosure – specifically between performance by wholesale vs. retail. That’s a critical component to analyzing any company in this space.
The precise changes are not 100% clear. If the company will give all previous data and simply add another dimension, then this is great. But anything else is bad news from our perspective.
The crux of our call on COH is in the summary of our 9-factor fundamental model listed below. Revenue growth is slowing, and SG&A growth is accelerating. A low teens multiple seems cheap, but margins are at 32%, and we think that there’s a better shot that they come down before new product launches succeed to the point where they could add enough scale to improve margin.