Coach: On the Right Track, Still Not Time to Buy

Coach (COH) is the worst performing stock in the S&P 500 this year–and Credit Suisse doesn’t see much hope for its shares despite the beaten down luxury retailer making all the right moves.

Credit Suisse analysts Christian Buss and Phan Le share their hopes and fears for Coach:

We now believe that Coach is on the right track following introduction of its brand transformation initiative, but remain concerned with respect to shares, given our view that earnings power will be delayed into late FY16 at the earliest. We are impressed by Coach’s plans to: 1) close 70 underperforming stores; 2) roll out a new store design concept and devote more resources to flagships; 3) create brand presence in department stores; 4) focus and intensify its marketing message; 5) reduce flash sale events (to 3 per month from 3 per week); and 6) improve product and seasonal flow in the outlet channel. We view these initiatives as necessary for long-term brand survival among increasing competition but expect returns to be delayed in late FY16, suggesting a multiple discount relative to peers remains in order…

Outlet And Full Price Store Balance Still A Cause For Concern. We believe Coach’s outlet business has reached a saturation point, likely weakening brand image in North America and adding to the deterioration of full price sales. Coach reiterated they believe they have the right mix of outlet versus full price stores and plan to close a moderate net total of 5 outlets in FY15 (opening 10 duel gender outlets while closing 2 locations and consolidating 13 men’s outlet locations into women’s stores). While they are invested in improving product (less logos and more leather) and limiting promotions to increase average transaction dollars, we view the surplus of outlet locations as dilutive to the brand and remain cautious on this strategy going forward…

We reiterate our Neutral rating, lower our FY15 EPS estimate to $2.05 from $2.84, and our TP to $30 from $39.

Shares of Coach have gained 0.3% to $35.18 at 12:46 p.m. today.