Operating Profitability Ratios: Net profit margin, Return on Equity, and Du Pont
Risk Analysis: Business Risk and Financial Risk, Variability, and Debt/Equity
Application of CAPM and Analysis
10F.Estimating the Value of the Company and Analysis
11• Sustainable Growth Rate
12• Investment Decisions
13G.Additional Measures of Relative Value and Analysis
14H.Measures of Value Added and Analysis
15I.Comments and Conclusion
1.Economy (Market) Analysis
Consumer spending proved very resilient against the challenge of gradually rising energy prices, as indicators of sales in the retail sector show. However, the difficulties caused by hurricanes Katrina, Rita and other tropical storms, as well as tensions in oil-rich areas might lead to record-high energy prices.
However, the retail sector in the Southeast was not very affected, especially in regard to its tangible assets: stores and means of transportation. The hurricane season is almost over, and the retailers hope to see an improvement in sales figures, especially because of the pressures all of them were subjected to this summer. After the fears caused by hurricane Katrina, the federal government took no chances and evacuated the population in affected areas, thereby making retailers with an important presence in the Southeast, such as Wal-Mart's (WMT), Dollar General (DG), Fred's (FRED), Family Dollar (FDO), and Dillard's (DDS). Fortunately, these problems are gradually solved.
The impact of the hurricane on oil and natural gas production and distribution will probably affect the retail sector some months from now on. Filling-up gas tanks and heating consumers' homes will definitely impact on the amounts available for spending in other sectors, and all retailers will definitely feel the pressure. In addition, transportation costs for all retail companies are subject to serious concerns.
High-end retailers such as (Coach COH), the object of this analysis, Neiman Marcus (NMG.A), Nordstrom (JWN) and Best Buy (BBY) are facing a serious test. High-energy prices related problems have plagued the industry during the previous few years, but the aforementioned companies have managed to get through the difficult periods without substantial difficulties, so no important slowdown should be expected. If, however, the stock price should happen to fall in some cases, that would probably be an opportunity to take advantage of, since prices will surely go up after a while.
The impact of high energy prices will have an impact on the results recorded by retailers throughout the year, and especially during the winter holydays, which are paramount for the industry. However, the impact will not probably be that significant, especially in the case of high-end retailers such as Coach, and all negative consequences should be on the short-term. Obviously, any short-term estimation of the price of COH shares is risky, since Coach might be under the influence of other factors. However, on the long-term, short-term phenomena such as the surge in energy costs will not influence substantially the value of the shares, which possess attractive growth potential.
Coach is an actor on the jewelry and accessories market, which has recorded increasing revenues during the last half of decade. Coach is one of the biggest players in the industry and has evolved alongside the market. Its earnings experienced rapid growth over the last few years, and that reflects in the value of the earnings per share indicator, which is now at record highs.
Coach is well-known for its high-quality, trendy designs, and managed to find a niche on the fiercely disputed market of moderate labels and designer brands. Coach gradually developed its brand and it currently faces little competition in the accessible luxury segment. This position represents a definite advantage for Coach, which will enable it to compete on the long-term with its present or future peers. Thanks to a financing structure based mainly on equity and to a low debt cost, the returns on invested capital exceed its cost of capital. Coach is currently expanding, takes advantage of all types of opportunities, both operational and financial, and has a strong position on the market because of its capacity to bring innovative products to consumers.
Coach is specialized in providing high-quality everyday accessories in variety of styles and materials. Among its products one could find wallets, handbags, footwear, watches and other accessories. More than half of its sales come from its U.S. retail stores network, which includes more than 200 stores. Sales strategies are also put in practice through department stores, international shops, the Internet, and a special company catalog.
The financial analysis of the Company indicates that the company has growth potential, although the price of shares is currently quite high. However, what is considered expensive in the present might be regarded as an opportunity in the future. Consequently, moderate buys of Coach shares are recommended at the time.
This paper contains a top-down analysis of Coach Inc. past and future evolution. The study employs the usual methods of financial analysis, such as financial ratios, in order to determine whether Coach stock is desirable at this time or not. Mathematical models such as CAPM have also been employed in order to assess the possible evolution on the market, based on previous results.
Revenue is sometimes expressed in percentage points (100%), in order to facilitate the comparison with similar companies. Consequently, other indicators, such as the Net margin or the Return on Assets are also expressed in percentage points.
C.Brief History of the Company
According to the data provided by the company itself in the 10-K form, Coach was founded in 1941 and has grown from a family-run workshop in a Manhattan loft to a leading American designer and marketer of high-quality, modern American classic accessories. Coach developed its initial expertise in the small-scale production of classic, high-quality leather goods constructed from "glove-tanned" leather with close attention to detail.
Coach sells its products worldwide through its own retail stores, select department stores, its online store and its catalogs. Coach has built upon its brand awareness in the United States by expanding into international markets, particularly in Japan and East Asia, diversifying its product offerings beyond leather handbags, further developing its multi-channel distribution strategy and licensing products with the Coach brand name.
D.Analysis of Financial Statements (Ratio analysis)
• Liquidity Ratios: Current ratio
The Current ratio is a liquidity ratio used to measure a company's ability to pay short-term obligations; and is calculated by dividing current assets by current liabilities. In addition, the ratio also gives a hint about the efficiency of the company's operating cycle.
The ratio indicates the company's ability to pay back short-term liabilities with their short-term assets. A high current ratio means that the company is very able to pay its obligations. A ratio under 1 indicates that the company is not able to pay off short-term obligations, which raises the concern for bankruptcy. Although it is not a sure that bankruptcy procedures will be initiated, a low current ratio it is not a sign of financial health.
A company's operating cycle (the ability to turn products into cash) is also scrutinized by the current ratio. Collection problems or long inventory turnover can trigger liquidity problems.
Coach exhibits impressive liquidity ratios, especially considering the steady increase during the past few years: the current ratio is currently at around 2,67, with a peak in 2004 at 3,88. The company has a very effective liquidity management program, as it succeeded to increase for the last few years the value of both the current ratio and the quick ratio by almost one point per year, which indicates that short-term debt are covered a few times over by short-term assets.
• Operating Efficiency: Asset Turnover
The asset turnover for the previous years has slowly decreased from 2,06 (in 2002) to 1,44 (in 2005). The somewhat constant values recorded by the Asset Turnover indicator during the last few years show that the company's management decided that the value of assets was to small when compared to the turnover, making further expansion difficult, or that some of the assets were already depreciated and their time-span had been exceeded. A analysis of other indicators, such as the Return on Assets, which records constant growths for some years, shows that the number of assets employed by the Coach is not excessively large when compared to the level of revenue. Consequently, Coach's management has probably found an optimal level for the Asset Turnover indicator at approximately 1.4-1.5
• Operating Profitability Ratios: Net profit margin, Return on Equity, and Du Pont
The Net profit margin recorded significant growths during the previous years and it has now reached 22.72%, which is more than double the value of 2001, for instance. What is really impressive is that the company has managed to maintain a very high level of the Return on Equity indicator: more than 42.5% percent during a 5-year period and a very…