Running Head FINANCIAL ANALYSIS1FINANCIAL ANALYSIS7.docx
Luyao_Yang_COH_Report
1.
Coach
.Inc
Porject
Valuation
and
Analysis
Luyao
Yang
Financial
Modeling
Section
84
2.
Coach
Valuation
and
Analysis
Business
Description
1.
Company
overview:
Coach
is
an
American
luxury
fashion
company
and
a
leading
American
marketer
of
luxury
lifestyle
handbags
and
other
fashion
accessories
for
both
men
and
women.
The
company
is
known
for
accessories
and
gifts
for
women
and
men,
including
handbags,
jewelry,
and
business
cases,
travel
bags,
footwear,
small
leather
goods
and
so
forth.
Since
1941
when
the
business
was
first
started,
coach
has
been
dedicated
to
produce
high
quality
products
as
well
as
build
the
unique
and
storied
brand.
Over
the
past
decades,
it
has
successfully
expanded
its
international
markets
into
Asia,
Europe,
Austria,
and
South
America.
2.
Business
strategy:
Since
the
forth
quarter
of
the
fiscal
year
of
2014,
Coach
announced
a
multi-‐year
strategy
to
transform
the
brand
and
reinvigorate
growth.
“This
strategy
includes
capital
investment
to
improve
the
previous
stores
and
wholesale
locations,
streamlining
and
optimizing
the
organizational
structure,
closure
of
non-‐performing
stores,
realigning
inventory
levels
and
mix
to
suit
consumer
preferences,
incremental
advertisement
expenses,
and
scale-‐back
of
promotional
activities.”(TREFIS)
Industry
Overview
and
Competitive
Positioning
1. Industry
overview:
Porter’s
five
force
analysis
Table
1:
Porter’s
Five
Forces
Competitive
rivalry
High
The
industry
structure
is
oligopoly
Bargaining
power
of
buyers
Medium
Brand
loyalty
Bargaining
power
of
the
suppliers
Low
Suppliers
are
not
concentrated
Threat
of
new
entrants:
Low-‐
Medium
Significant
capital
expenditure
and
high
brand
loyalty
Threat
of
substitute
products
Low-‐
Medium
Brand
loyalty
and
high
income
customers
2. Competitive
positioning
Table
2:Comprtitive
positioning(
source:
fidelity)
COH
KATE
KORS
Industry
Average
Market
Cap:
11.19B
3.21B
9.26B
3.97B
Revenue
growth
rate
(
5year)
3.05%
-‐13.05%
53.79%
11.66%
Gross
Margin
73.71%
60.68%
59.44%
51.89%
EPS
Growth
(5
years)
-‐9.05%
-‐
82.73%
16.48%
ROA
7.99%
2.39%
33.12%
13.32%
Operating
Margin
17.05%
10.28%
25.84%
14.25%
3. Basing
its
image
of
affordable
luxury,
coach
reaches
out
to
a
larger
demographic
compared
to
its
competitors
in
the
luxury
goods
market
such
as
Louis
Vuitton,
Prada,
Gucci
and
Dooney&
Bourke.
These
competitors
tend
to
focus
on
a
higher
income,
high
fashion
demographic.
However,
company
like
Kate
Spade
and
Michael
Kors
are
more
similar
to
Coach
in
term
of
their
price
range
and
products
offerings.
From
table
2,
we
can
find
that
COH
has
a
large
Market
Cap
in
the
industry.
However,
Revenue
growth,
EPS
growth
rate
and
ROA
is
less
than
that
of
industry
average.
Meanwhile,
Michael
Kors,
the
competitor
of
COH
is
doing
very
well
in
terms
of
revenue
growth
rate
and
has
a
huge
momentum
in
the
future.
At
this
point,
COH
is
not
in
a
good
position
of
competition.
It
may
need
to
change
development
strategy
to
stand
out
of
its
competitors.
Financial
Analysis
1. Valuation
Analysis
The
P/E
ratio
is
similar
to
industry
average.
However,
when
looking
backward
for
several
years,
we
can
find
that
the
EPS
was
decreasing
while
the
P/E
ratio
was
increasing.
This
may
tell
us
that
the
stock
price
is
overvalued.
At
the
same
time,
we
noticed
an
increasing
dividend
payout
ratio.
The
company
tries
to
use
a
higher
dividend
payout
ratio
to
attract
investors
and
prevents
the
stock
price
from
decreasing
too
much
because
of
the
drop-‐off
of
earnings.
In
the
following
five
years,
we
find
a
slightly
increase
of
EPS.
This
is
because
we
forecast
an
increase
of
earnings
in
the
next
five
years.
2. Profitability
Analysis
COH
has
a
lower
return
on
asset
and
return
on
equity
compared
to
industry
average.
This
tells
us
that
the
in
recent
years,
coach
has
low
profitability
ability.
What
is
more,
the
net
profit
margin
in
2015
is
just
slightly
higher
than
that
of
the
industry
average
and
we
predicate
that
in
the
next
few
years
the
net
profit
margin
will
continue
to
decline
and
below
the
industry.
Also,
the
asset
turnover
ratio
is
also
less
than
the
industry
average,
Table
3:
Valuation
Ratio
2015
2016
2017
Industry
Average
P/E
Ratio
23.99
-‐
-‐
24.45
P/B
Ratio
3.88
-‐
-‐
6.09
Book
Value
9.03
9.49
10.03
12.29
Table
4:
Profitability
Analysis
2015
2016
2017
Industry
Average
ROA
8.62
%
8.58
%
8.53
%
13.32
%
ROE
16.16
%
14.94
%
12.21
%
23.43
%
Net
Profit
Margin
9.6
%
8.64
%
8.55
%
9.48
%
Asset
Turn
over
0.898
0.994
0.992
1.39
ROS
14.59
%
12.89
%
12.83
%
9.81
%
Table
5:
Liquidity
Risk
Analysis
2015
2016
2017
Industry
Average
Current
Ratio
3.00
3.53
3.02
2.80
Quick
Ratio
2.33
2.67
2.29
-‐
Account
Receivabl
e
Turnover
20.05
20.00
38.23
14.90
Inventory
Turnover
2.54
2.72
2.72
3.24
Account
Payable
Turnover
6.59
8.50
8.50
-‐
4. which
indicates
a
bad
efficiency.
Therefore,
we
can
conclude
that
the
company
does
not
have
a
good
profitability
in
recent
years.
3. Liquidity
Risk
Analysis
Coach
has
higher
current
ratio,
account
receivable
turnover
ratio
compared
to
industry
average,
which
indicates
that
the
company
has
a
relative
low
liquidity.
Especially,
the
current
ratio
is
more
than
three.
This
tells
us
that
for
each
unit
of
liability,
the
company
has
more
than
three
units
of
current
assets
to
cover.
The
inventory
turnover
ratio
is
slightly
lower
than
that
of
the
industry
average,
which
is
related
to
the
decreased
revenue
during
the
past
several
years.
However,
this
is
under
the
acceptable
range
of
inventory
turnover
ratio.
Therefore,
the
company
has
relative
low
short-‐term
liquidity
risk.
4. Solvency
Risk
Analysis
Coach
has
a
similar
debt
to
equity
ratio
compared
to
industry
average.
What
is
more,
the
interest
coverage
ratio
is
relative
high,
especially
in
2015.
Also,
operating
cash
flow
to
total
liabilities
is
almost
45%.
From
the
data
of
the
past
five
years,
we
find
that
the
company
starts
to
use
debt
to
finance.
It
has
changed
its
capital
structure
to
some
extent.
However,
debt
is
not
too
much
compared
to
equity.
Therefore,
we
can
conclude
that
the
company
does
not
use
too
much
debt
finance
and
it
has
a
lot
of
cash.
From
the
analysis
above,
the
long-‐term
solvency
risk
is
low.
Valuation
1. WACC
WACC
is
the
weighted
average
of
cost
of
capital.
There
are
five
components
in
WACC,
including
cost
of
equity,
cost
of
debt,
market
value
of
firm’s
equity,
market
value
of
firm’s
debt
and
corporate
tax
rate.
We
can
get
three
similar
WACC
based
on
Gordon
per-‐share
dividends,
classic
CAPM
and
adjusted
CAPM.
The
average
value
based
on
those
three
methods
is
the
estimated
WACC
used
for
prediction.
Table
6:
Solvency
Risk
Analysis
2015
2016
2017
Industry
Average
Debt
to
Equity
36
%
34
%
32
%
37.93%
Interest
Coverage
Ratio
96.56
15.39
16.78
-‐
Operatin
g
CF
to
total
liability
43.06
%
-‐
-‐
-‐
Table
7:
WACC
WACC
based
on
Gordon
per-‐share
dividends
7.63%
WACC
based
on
classic
CAPM
5.60%
WACC
based
on
tax-‐
adjusted
CAPM
5.60%
Estimated
WACC
(Average)
6.28%
Table
8:
Valuation
Enterprise
Value
Share
Price
Method
1
11550.34227
44.20
Method
2
13159.59837
48.36
Method
3
10083.41
45.34
5. 2. Valuation
Model
1)
Method1:
Valuation
in
Pro
Forma:
Based
on
pro
forma
financial
statements,
we
can
get
the
free
cash
flow
in
next
five
years.
After
the
determination
of
terminal
value
based
on
long-‐term
free
cash
flow
growth
rate,
we
can
discount
back
the
FCF
into
2015
and
get
the
enterprise
value
as
well
as
the
estimated
share
price.
2)
Method
2:
Simplified
DFC
Approach
We
get
the
previous
three-‐year
free
cash
flow
based
on
cash
flow
statement.
Based
on
the
FCF
in
2015,
we
determine
a
short0term
FCF
growth
rate,
which
is
5.0%,
and
a
long-‐term
free
cash
flow
growth
rate
(3.5%)
to
get
the
next
five
year’s
FCF.
Then
we
discount
back
all
those
FCF
to
get
the
enterprise
value
as
well
as
stock
price.
3)
Method
3:
Efficient
Markets
Approach
We
use
the
balance
sheet
of
2015
and
move
all
of
the
net
working
capital
to
the
right-‐hand
sides
and
all
of
the
financial
items
into
the
left-‐hand
sides.
Then
we
replace
the
equity
with
the
market
value
to
get
the
enterprise
value
as
well
as
the
share
price.
4)
Result:
Based
on
our
assumption
about
WACC,
revenue
growth
rate,
dividend
growth
rate,
income
tax
rate
and
so
on,
we
get
approximately
similar
valuation
result
from
the
pro
forma
valuation
method,
the
simplified
DCF
valuation
method
and
the
efficient
market.
The
estimated
enterprise
value
is
around
12billion
and
the
share
price
should
be
around
46.
Sensitivity
Analysis
1. Investment
risk
We
use
the
crystal
ball
to
make
10000
times
simulation
about
the
share
price
by
using
different
valuation
method.
The
Pro
forma
method
gives
us
the
distribution
of
share
price
as
shown
in
figure
1.
The
distribution
is
negative
skewed
with
a
large
kurtosis.
From
the
simulation,
we
can
find
that
there
is
82.27%
possibility
that
the
price
is
less
than
the
market
price
of
35.02
in
2015.
Similarly,
the
simplified
DCF
approach
also
gives
us
a
negative
skew
and
there
is
a
76.47%
possibility
that
the
price
will
below
35.02.
2. Drivers
of
Uncertainty
Figure
1:
Share
value
(based
on
method
1)
Figure
2:
Share
value
(based
on
method
2)
6.
From
the
sensitivity
chat,
we
can
find
that
for
the
pro
forma
valuation
method,
WACC,
dividend
growth
rate
and
revenue
growth
rate
are
the
three
main
drivers
of
uncertainty.
Especially,
the
WACC
is
a
key
negative
driver
and
plays
an
important
role
in
the
value
of
stock
price;
For
the
simplified
DCF
method,
WACC,
short-‐term
growth
rate
of
cash
flow
and
income
tax
rate
are
the
drivers
of
uncertainty.
Also,
the
WACC
is
the
key
negative
driver
for
the
share
price.
3. Opportunity
Even
though
there
is
a
high
possibility
that
the
share
price
is
over-‐valued,
we
can
still
find
under
out
assumption,
the
price
can
be
as
high
as
107.22
for
the
pro
forma
valuation
method
and
98.12
for
the
simplified
valuation
method.
Therefore,
there
is
a
high
potential
of
the
stock
price.
Investment
Summary
1.
For
conservative
investors:
From
the
financial
analysis,
valuation
analysis
as
well
as
the
sensitivity
analysis,
the
target
price
of
Coach
should
be
around
46$,
which
is
higher
than
the
market
price.
However,
the
possibility
of
price
less
than
the
market
price
(35.02)
is
very
high
no
matter
which
valuation
method
we
apply.
Therefore,
for
those
conservative
investors,
I
suggest
them
to
sell
the
stock.
2.
For
long-‐term
investors:
Since
2012,
the
company
does
not
perform
very
well
because
of
the
decrease
in
revenue.
Therefore,
the
stock
price
has
been
decreased
a
lot
in
the
past
three
years.
However,
in
the
long
run,
we
expect
the
economy
turns
to
be
better
and
the
company’s
transformation
strategy
brings
positive
effect
into
the
firm
operation.
Therefore,
for
those
long-‐term
investors,
I
suggest
them
to
hold
the
stock
of
coach
and
wait
for
the
price
to
rebound
to
its
historical
high
level.
Figure
3:
Sensitivity
(based
on
method
1)
Figure
4:
Sensitivity
(
based
on
method
2)
