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Coach's Top-Line Growth Is Really Clutch

First-quarter revenue grew 1% year over year, with strength in most key markets and distribution channels.


Narrow-moat  Coach's (COH) first-quarter positive top-line growth and significant operating margin expansion was an even more notable achievement when taking into account handbag and retail traffic headwinds. We are reassured that plans to elevate the brand, strategically balance distribution channels, and improve profitability are proceeding on track and yielding the desired metric improvements. As a result, we see little change to our $42 fair value estimate or our belief that Coach can achieve mid-single-digit average annual revenue growth and adjusted operating margin expansion from 17% in fiscal 2016 to the low-20% range (in line with the historical three-year average) over the next five years.

First-quarter revenue grew 1% year over year, with strength in most key markets and distribution channels. Although Coach sales at North American department stores declined approximately 30% on both a point-of-sale and net sales basis, we think this is solely reflective of the company’s decision to rationalize department store distribution and reduce promotional events in the channel, a decision we view as key to elevating the brand. In the first quarter, Coach closed about 120 of its planned 250 (about 25% of door count) location closures for the year.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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