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Burberry Rises on Merger Speculation Talks with Coach

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Price movement

Coach (COH) has a market cap of $10.1 billion. It fell 1.0% to close at $35.55 per share on October 21, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were -0.86%, -2.9%, and 11.5%, respectively, on the same day. COH is trading 1.6% below its 20-day moving average, 4.4% below its 50-day moving average, and 6.1% below its 200-day moving average.

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Related ETF and peers

The ALPS Sector Dividend Dogs ETF (SDOG) invests 2.0% of its holdings in Coach. The ETF tracks an equal-weighted index of the five highest-yielding S&P 500 securities in each sector. The YTD price movement of SDOG was 17.0% on October 21.

The market caps of Coach’s competitors are as follows:

  • The Estée Lauder Companies (EL) – $31.6 billion
  • Ralph Lauren (RL) – $8.0 billion
  • Michael Kors Holdings (KORS) – $8.4 billion

Latest news on Coach

In a press release, Bloomberg reported that “Burberry Group Plc shares rose the most in almost eight months after the Betaville financial blog said Coach Inc. is considering merging with the British trench coat maker.”

In another release, Reuters reported that “Britain’s Burberry and America’s Coach are not in active merger talks, sources familiar with the matter said on Friday, in reaction to a report that suggested the two fashion companies were mulling a tie-up. ‘This is completely speculative. There are no negotiations underway, Burberry is not talking to Coach,’ one of the sources said. Another source with first hand of the matter said such plan could not be on the cards since the two companies pursued very different strategies.”

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Performance of Coach in fiscal 4Q16 and fiscal 2016

Coach reported fiscal 4Q16 net sales of $1.2 billion, a rise of 20.0% over the net sales of $1.0 billion in fiscal 4Q15. The company’s gross profit margin fell 1.0% between fiscal 4Q15 and fiscal 4Q16.

Coach’s net income and EPS (earnings per share) rose to $81.5 million and $0.29, respectively, in fiscal 4Q16, compared with $11.7 million and $0.04 in fiscal 4Q15. It reported adjusted EPS of $0.45 in fiscal 4Q16, a rise of 45.2% from fiscal 4Q15.

Fiscal 2016 results

In fiscal 2016, COH reported net sales of $4.5 billion, a rise of 7.1% YoY (year-over-year). The company’s gross profit margin fell 0.23%, and its operating income rose 5.7% in fiscal 2016. Its net income and EPS rose to $460.5 million and $1.65, respectively, in fiscal 2016, compared with $402.4 million and $1.45, respectively, in fiscal 2015.

Coach’s cash and cash equivalents and its short-term investments and inventories fell 13.3% and 5.3%, respectively, in fiscal 2016. Its current ratio and debt-to-equity ratio fell to 2.6x and 0.82x, respectively, in fiscal 2016, compared with 3.0x and 0.87x in fiscal 2015.

Projections

The company has made the following projections for fiscal 2017:

  • revenue growth in the low to mid-single digits, including foreign currency benefits of ~1.0%–1.5%
  • operating margin in the range of 18.5%–19.0%
  • interest expense of ~$25 million
  • tax rate of ~28%
  • net income growth in the double digits
  • EPS growth in the double digits

Next, we’ll look at Kellogg Company (K).

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