Coach Sell Aster Winter10

Scott Aster Finance 573: Coach Inc Sell Report 3/1/2010Sector: Consumer Discretionary Industry: Apparel & Footwear

Coach Company Analysis

Recommendation: Sell Coach

The current recessionary environment has had a strong negative impact on individual income levels, consumer spending and consumer credit availability. As a producer of high priced luxury goods Coach stands to suffer from the state of the economy as conspicuous consumption is frowned upon and consumer frugality is in fashion. These are factors that significantly impact Coach’s financial outlook as the company has experienced declines in both same store sales as well as earnings from fiscal 2008 to fiscal 2009. Coach’s gross margins are also shrinking as the company has had to increasingly rely upon its factory outlet stores to sell its products1. This also presents the problem of brand dilution.

From a valuation perspective Coach’s P/E ratio, currently at 18.23, is well above the apparel industry average of 3.26, which suggests that from a relative valuation perspective the company may be overpriced2. Furthermore, the DCF analysis indicates an intrinsic value of approximately $35.00 while the current share price is $38.27 (3/11/10 close). Based on this quantitative data the stock is currently overpriced and has very little upward potential within our investment horizon. The stock’s price has increased over 200% in the past year and has been fluctuating between $34.00 and $37.00 since October (please see Appendix 1). The alpha from this stock was fully extracted in 2009 and the Coach holdings have run their course. The intent of this report is to illustrate that based on a combination of qualitative and quantitative factors this stock is currently overvalued and it is preferable to sell Coach and seek another stock to replace its value.

Company Overview

Coach Inc. specializes in the production of premium lifestyle accessories and is one of the most recognizable luxury brands in both the United States and Japan. The company provides innovative and fashionable products at relatively attractive prices. Coach’s product line consists of handbags (64%), accessories (28%) and other (8%) products including footwear, jewelry, brief cases, etc (please see Appendix 2). Major elements of differentiation include: its distinctive brand name, market leadership position, loyal customer base, multi-channel international distribution and its consumer-centric design operations3.

The Coach brand name is associated with quality and value due to the company’s expertise in design and emphasis on providing attractive prices to customers. Coach is the market share leader for handbags and accessories in the U.S. and Japanese markets (please see Appendix 3) and is targeting emerging markets such as China for further

1 Coach Inc, 2009 Annual Report: 22.2 Reuters/COH. http://www.reuters.com/finance/stocks/overview?symbol=COH.N3 Coach Inc, 2009 Annual Report: 1.

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growth opportunities. The company has cultivated an emotional attachment between its customers and its brand through continually producing superior value and being abreast of market trends. Coach products are sold through both its own retail outlets as well as other established retailers worldwide and through its online catalog. It is a consumer centric business as the company conducts rigorous consumer research in gauging changing trends and consumer interests. The company’s design and merchandising teams are well respected for collaborating to forecast fashion trends and produce quality products that are appropriate for each season4.

Supply Chain

Production begins with Coach’s New York-based design and merchandising teams. These two teams work in tandem to produce items that perpetuate the Coach brand and its image of quality. The design team conceptualizes Coach products and has access to the company’s archives of 70 years worth of design concepts. These archives are a valuable resource for new design concepts. The designers are supported by a merchandising team that excels in consumer research. Merchandisers are responsible for analyzing products and adding as well as deleting lines in order to achieve profitable sales across all channels. The product category teams, which consist of both designers and merchandisers, help Coach execute design concepts that are consistent with the company’s brand image and strategic direction.

While Coach controls the design of its products the manufacturing is done by independent contractors. Coach ensures quality raw materials go into its products by maintaining sourcing and product development offices in Hong Kong, China, South Korea and India that work closely with the independent manufacturers. The rigorous selection of raw materials has been key to maintaining Coach’s brand image of superior quality. Coach factories are in low cost markets such as China, Thailand, Vietnam, Turkey, Ecuador and others. The company’s commitment to maintaining material quality combined with the low cost manufacturing process has been an integral aspect of the company’s financial success.

Coach operates an 850,000 square foot distribution center in Jacksonville, Florida. This automatic facility uses a bar code scanning warehouse management system. Coach’s employees use scanners to read product bar codes which allows for more accurate pack orders, track shipments, inventory management and overall better customer service. Products are then delivered from this warehouse to Coach retailers and wholesale customers5.

4 Wikinvest/COH. http://www.wikinvest.com/wiki/Coh5 Coach Inc, 2009 Annual Report: 7-8.

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http://www.wikinvest.com/wiki/Coh


Industry Overview

Coach is considered to be in the apparel and footwear industry. As a producer of luxury accessories, Coach occupies a smaller niche portion of this market enabling greater flexibility in product pricing. Coach has established a reputation for quality and value as well as a brand name that enables it to extract premiums within its industry. Though the S & P 500 peer composite lists companies such as Tiffany’s Inc, Kenneth Cole Productions and William Sonoma, Coach’s most significant competition does not take place within the United States6. The handbag market is primarily dominated by European companies such as Gucci, Fendi, Prada, Louis Vitton and others. These companies are at the highest price point in the accessories market with handbag prices in excess of $1,000. The primary demographic for the elite handbag market is the affluent and extreme brand oriented consumer. Coach’s handbags are described as “affordable luxury” items as the company competes at a lower price point of $300-$8007. Coach has a multi-tiered pricing strategy as it utilizes its own retail as well as department store sales to capture higher price points while selling its older merchandise at factory outlet stores to capture the lower end of its market. The demographic for Coach’s products is primarily the middle to upper middle class.

Industry Trends

S & P Net Advantage predicted that apparel industry sales would experience declines in the range of 3%-15% in 2009. However, apparel sales were actually slightly improved in 2009. According to the Census Bureau sales in the apparel industry, down 7.7% from ’07 to ’08, were up 2.2% from ’08 to ’09 (please see Appendix 4). However, the major trend occurring in the apparel industry is referred to as the “New Normal” which entails lower consumer spending and long term downward revisions in demand for apparel products in response to the current recessionary environment (please see Appendix 5). This New Normal concept involves a more fiscally responsible consumer weary of credit card debt and overspending8. A survey conducted by Nielson Global Online indicated that in this time of rising living costs the first items to be excluded from consumers’ budgets were new clothing purchases (please see Appendix 6).

None of this bodes particularly well for Coach as a producer of luxury accessory products. Coach’s products are highly substitutable by lower priced generic handbags. However, the factory outlet stores do alleviate some of this concern as they provide Coach access to a more price sensitive consumer market. In the current economic climate Coach’s sales have come increasingly from the factory stores, which mark products down 10-50%9. While this is providing the company with greater short term sales it is resulting in lower gross margins and could cause long term harm to the company’s brand image. Coach must try to avoid becoming ‘too accessible’ as part of

6 Edgaronline.com/COH/peer composite. http://yahoo.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=6116953-87124-91920&SessionID=roI6WqQv68Cghw77 Coach homepage. http://www.coach.com/online/handbags/Home-10551-10051#8 http://www.netadvantage.standardandpoors.com/apparel 9 Coach Inc, 2009 Annual Report: 4.

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http://www.netadvantage.standardandpoors.com/apparel

http://www.coach.com/online/handbags/Home-10551-10051

http://yahoo.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingHtmlSection1?SectionID=6116953-87124-91920&SessionID=roI6WqQv68Cghw7

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the allure of its products is their luxurious image. If Coach products become too mainstream there is the potential that this luxurious image may be lost and the company will struggle to extract greater premiums as the economy recovers.

Multi-Tiered Pricing Strategy

Coach’s products are considered luxury items but are more accessible than most luxury handbags due to the variety of price points that the company offers. The most up to date seasonal merchandise is sold thru its retail stores. These are generally in upscale downtown areas with a target market of the upper middle class to the affluent. The retail prices are generally between $300 and $800. There are no discounts in Coach’s high end retail stores. Coach also distributes its products to high end department stores such as Macy’s and Nordstrom. These department stores are prohibited from discounting Coach’s products. Factory outlet store sales have become increasingly significant to Coach’s financial success in the 4 years. The company sells its unsold merchandise through these outlet stores. Products sold through the outlet stores are generally a year old or older and are marked down 10%-50%. Coach also uses the internet as well as a company catalogue to sell its merchandise. Currently approximately 84% of Coach’s sales are direct-to-consumer, which includes the retail stores, factory outlets, the website and the catalogue. Approximately 16% of Coach sales take place thru indirect channels, which consists of the high end department stores10.

As mentioned before, Coach’s increasing reliance on factory stores for sales are cause for concern as the brand’s luxury image may become diluted as the economy recovers. According to Coach’s earnings calls the company’s factory store sales have been so successful that it is actually beginning to produce “made-for-factory” products11. Women wear luxury handbags as differentiating status symbols. When a luxury item becomes too accessible to all consumers there is no allure for the career women with money to purchase such an item as they do not want to wear what teenagers wear. This results in downward revisions in consumers’ opinions and price expectations of the brand and as a result hurts gross margins. This is problematic as the company becomes a low margin producer it will be competing against a greater amount of cheaper generic handbags. Efforts should be taken to protect Coach’s brand identity and ensure that the company’s price points and brand image remain above those of generics avoiding the temptation to lower prices in difficult economic times.

Geographic Expansion

10 Coach Inc, 2009 Annual Report: 64.

11 Coach, Inc. F2Q10 (Qtr End 12/26/09) Earnings Call Transcript.

http://seekingalpha.com/article/183440-coach-inc-f2q10-qtr-end-12-26-09-earnings-call-transcript?source=bnet

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Coach is number one in the U.S. and number two in Japan in terms of luxury handbag market share. The U.S. represents 72% of Coach sales while Japan represents 25%. Coach has aggressive expansion plans for these two markets. Coach currently operates 330 retail stores in North America and believes that the North American market can support approximately 500 retail stores. Similarly Coach currently operates 155 retail stores in Japan and believes that the Japanese market can support 180 retail stores. Coach intends to continue on with its expansionary agenda despite the economy as the company is planning to build 20 new North American stores and 10 new Japanese stores in 201012. However, Coach has little to no market share in Europe as several of the aforementioned elite handbag brands dominate the European landscape. Due to the luxurious nature of the product there is very little potential for Coach to expand in developing nations as the company has almost no presence in South America, Africa or Southeast Asia. However, Coach is planning for aggressive expansion into the Chinese market. The Chinese market represents 1% of Coach sales with the company currently owning 28 stores there and planning to open 15 new locations in 2010. However, the struggle for Chinese market share will be extremely competitive as the European companies will also be entering this market. Coach is banking on the assumption that the massive increase in Chinese wealth will be great enough to support numerous luxury handbag producers entering the Chinese market.

Coach’s plans for geographic expansion during this recessionary environment are cause for a bit of concern. The company’s 1.6% increase in sales from ’08-’09 were driven purely by expansion while same-store sales declined 6.8%, gross margins dropped 4%, net margins dropped 5% and earnings dropped 20%13. Aggressive expansion as the comparable earnings of the company decline is a very risky strategy. Coach management appears to have a rosy outlook regarding its positioning in the economy beyond this current recession. Despite its expansionary plans there are not many markets for Coach to expand in outside of the North America, Japan and China. The luxurious and niche nature of its product don’t necessarily attract consumers in lower income economies. This geographic concentration may limit Coach’s growth opportunities in the long term and potentially prohibit upward movements in its stock.

Financial Analysis

Coach’s income statement for fiscal 2009, which includes June 30, 2008 thru June 30 2009, reflects the overall trends taking place in the consumer discretionary sector. The slight sales increase of 1.6% is largely due to store expansion as 33 North American stores were added (an 11% increase), 9 new factory outlet stores (a 9% increase), 6 new Japanese stores (a 4% increase) and 4 new China stores (a 17% increase). This increase in sales coincided with a severe 20% decrease in net income14. This conflicting increase in sales with such a large drop in earnings reflects a significant decrease in net margins.

12 Coach Inc, 2009 Annual Report: 18.13 Coach Inc, 2009 Annual Report: 20.14 Coach Inc, 2009 Annual Report: 3.

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In the notes to Coach’s financial statements the company attributes this to an increasing reliance on its factory outlet stores for sales. The company also recognizes the factory stores increasing impact on its sales in its recent earnings calls. However, there was no breakdown of sales by factory stores versus other channels in its 10k or anywhere else so I was unable to determine the exact percentage of this increasing reliance on factory stores. Prior to 2009 Coach’s gross margins were generally around 76%-77% while its net margins were usually between 23% and 24%. However, in 2009 the gross margins dropped to 71% while the net margins slipped to 19% (please see Appendix 7). The 10Q for Coach’s 2009 holiday season, which is actually Q2 2010 for Coach, reflected slightly better results than the previous year that was reflected in the company’s 2009 income statement. Both sales (11%) and net income (11%) increased from the holiday season of ’09 versus ’08 (please Appendix 8). The improved holiday sales resulted in trailing twelve month sales that were 3.5% better than the 2009 income statement. However, neither the gross nor net margins have improved and are both still at 71% and 19%.

Coach’s balance sheet is very strong. The company has $1.1 billion in cash, which represents more than a third of its total assets and almost doubles the company’s current liability total. This strong working capital position is further aided by the fact that the company’s current assets are three-fold greater than its current liabilities. This is imperative as maintaining a strong working capital is key in the apparel retail industry. Even more impressive is the company’s capital structure. Coach has only $25 million in debt, making it 98% reliant on equity versus 2% on debt for its financing15. This strong cash position with its little to no debt gives Coach a lot financial flexibility in these difficult economic times. Coach has decided to utilize this financial flexibility by expanding into new markets and fortifying old ones. This is illustrated by the increase in capital expenditures indicated in the DCF analysis as the company’s TTM capital expenditures have increased to over $500 million, which over twice as much as the prior year. While the company is financially healthy enough to undergo such expansion whether this is the prudent use of funds in this recessionary environment is yet to be seen. I am skeptical as to whether the demand for this product in this difficult economy will support such expansion.

Coach also has a very strong cash flow statement. Cash inflows from operations were $800,000 which indicates that the company is doing a solid job of generating cash from its operations. The company’s primary outflows are capital expenditures and stock repurchases ($450,000)16. These outflows indicate that the company is very bullish on its future prospects and is willing to spend large amounts on both expanding along with providing shareholders’ returns on their investments. This stock payback will increase returns on equity as the equity decreases.

In conclusion, Coach’s income statement reflects lower margins and decreasing same store sales while the increase in overall sales is supported by expansion. Coach’s demographic has drifted toward a more frugal consumer willing to purchase last years’ merchandise at a lower price point. This is reflected in lower gross and net margins.

15 Coach Inc, 2009 Annual Report: 38.16 Coach Inc, 2009 Annual Report: 41-42.

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Meanwhile, the balance sheet is trending positive as the company has little to no debt and is able to fund its expansion with its giant cash account. The company is also using its cash to buy back equity, returning value to its investors and lowering its equity base. Outside of the current recessionary environment impact on Coach’s sales it appears that company is financially healthy.

SWOT Analysis

Strengths

Core Competence in design and merchandising: Coach has over 70 years worth of design archives to assist it in producing products for each season. This long history in the handbag/accessory market gives it a competitive advantage as it has a vast amount of previous designs to build off of when producing products for each season. This long company history has also given the merchandising team strong experience in developing consumer research capabilities and given it a keen sense of what its target demographic wants.

Multi-tiered pricing strategy: Coach’s product is classified as a “luxury” item but is accessible to a larger market due to the variety of price points that the company offers. These include high end retail and department stores as well as the cheaper factory outlets. Analysts have noted that this tiered pricing strategy is not

common in the luxury goods industry, which on average has higher entry-level price points than that of Coach. This pricing structure allows the company to attract affluent consumers while also providing lower-income consumers access to a brand they would not be able to afford otherwise. Throughout the recession this has kept overall sales numbers stable though it has caused margins to dip.

Established brand name: Brand names are what allow companies in the apparel industry to de-commoditize clothing/accessory products and extract premiums from the market. Throughout its history Coach has developed a reputation for providing its customers both quality and value. This has helped the company establish a following of consumers that buy Coach products exclusively.

Lots of cash and almost no debt: Coach has a strong balance sheet which allows it to finance its operations internally. This is a huge boon to a luxury brand business in a recessionary economy and provides it with a strong financial competitive advantage as luxury competitors’ may not have access to such financing. This cash advantage allows Coach to expand without the need to rely on currently expensive (or unavailable) leverage.

Weaknesses

Geographic concentration: Coach currently relies on just the U.S. and Japan for 97% of its sales and it may be difficult to expand this limited geographic reach.

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Coach is very limited in its expansion possibilities. Europe is entirely dominated by the elite European luxury brands while there is not yet a market for luxury items in many emerging markets. This leaves Coach with expansion potential in its existing markets: the U.S. and Japan. However, these markets are beginning to saturate and it may be risky to further expand in these markets in this economic environment. China is the major new market that Coach intends to expand in and this will be an extremely competitive expansion as the elite European brands will also enter the Chinese market.

Declining margins: Coach is experiencing declining margins on its products. This is primarily due to the economy’s impact on luxury brand purchases which has caused sales at its factory stores to increase as more consumers seek bargains. Coach has been relying on sales at its lower price points and though net sales have remained steady the margins have shrunk from 36.1% in fiscal year 2008 to 30.1% in fiscal year 2009. This is a troubling trend for a luxury company that relies on its brand to produce superior margins on its sales.

Opportunities

Expansion in the U.S., Japan and China: As previously mentioned Coach’s sales take place predominantly in the U.S. and Japan. The company’s CEO feels that, while the company has 330 stores in North America, that this market can support up to 500 stores. And while there are currently 155 Coach locations in Japan management believes that the Japanese market can support a total of 180 stores. With the rise of China’s middle and affluent classes the Chinese market has become increasingly important for luxury brands such as Coach. Over the next 5 years Coach plans to open a total of 50 retail locations in China and increase its market share from 3 to 10%.

Threats

Luxury brand susceptible to recessionary environment: Retailers have had to weather a difficult economic environment since 2008. Consumers are unsure of their financial security as companies have resorted to laying off workers in an effort to cut costs. In an uncertain economic environment consumers seek to cut costs and save as much money as they can, and clothing is usually the first to go. Luxury clothing and accessory items, in particular, have been and will be affected the most in this New Normal economic environment.

Brand dilution: As a luxury retailer, Coach heavily relies on an image of exclusivity to fuel interest and sales of its products. A luxury company can lose its allure if the brand becomes too popular or too accessible. Coach risk’s losing this luxury status by selling through its factory outlet stores. This cheaper sales channel makes Coach’s product available to a different target demographic than Coach’s traditional luxury consumers. This accessibility to a lower end market may put off Coach’s high end consumers who value the exclusivity of the brand.

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In the long run this brand dilution may negatively impact both Coach’s margins and its brand image.

Performance Analysis

Below are some performance indicators that illustrate Coach’s superior financial performance relative to a couple stronger competitors as well as to its industry and sector averages17:

ROE ROA Net Profit MarginCoach 41.30% 30.08% 22.48%Polo Ralph Lauren 16.39% 9.99% 8.12%Tiffany & Co 16.59% 10.14% 11.05%Industry 14.43% 8.32% 5.10%Sector 8.83% 3.24% 3.32%

Polo Ralph Lauren and Tiffany & Co. are some of Coach’s top domestic competitors. These three are the only companies to have positive earnings and hence report P/E ratios within Coach’s S & P peer composite of six companies which also included Kenneth Cole Productions, Ann Taylor Stores, William Sonoma and Talbots. Coach is clearly a top performer within its industry as the company has vastly outperformed the industry averages in ROE, ROA as well Net Profit. It has outperformed the sector averages even more significantly and its stock has been a top performer in the apparel industry over the last 5-6 years (please see Appendix 7). Furthermore the company has exceeded some of its better performing peers in these financial metrics. The equity buy backs are clearly aiding in the return on equity metric and though the margins are decreasing they are still above the vast majority of companies within its industry. However, it would be more informative to look at some of the company’s more comparable European competitors. However, this data are currently unavailable.

Relative Valuation Analysis

Below are some relative valuation figures relating Coach, some of its domestic competitors as well the industry and sector averages18.

EPS P/E P/SalesCoach 2.00 18.60 3.49Polo Ralph Lauren 4.04 19.84 1.62Tiffany & Co. 1.27 34.34 2.12Industry N/A 3.57 0.24Sector N/A 35.10 0.20

17 www.reuters.com 18 www.reuters.com

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In looking at the above data it appears that Coach’s P/E ratio is well below the consumer discretionary sector average, which is most likely due to a dearth in earnings in this sector from the prior year. However, Coach’s P/E ratio is well above industry average of \3.57. This may indicate that the company is overvalued. Coach’s P/E ratio is in line with Polo Ralph Lauren’s and well under Tiffany’s. While Coach’s high P/E ratio may reflect an overvalued stock the Discounted Cash Flow analysis will be the primary indicator in that regard.

DCF Analysis

Provided are the inputs for my WACC calculation:

Risk Free 10 Year Bond 4.40%Risk Premium 5.17%Beta 1.30Cost of Equity 11.10%Equity Weight 98.00%Debt Rate 4.68%After Tax Cost of Debt 3.00%Debt Weight 2.00%WACC 10.96%

Coach’s beta is listed on multiple websites as being in the range of 1.73. Initially this number was used in the WACC calculation with the cost of capital being over 13%. However, upon further consideration this beta was deemed too high and that a number closer to the industry average was more appropriate. However, according to Reuters the apparel industry average beta is 0.84, which is far too low for a luxury brand producing a highly discretionary product. Using the industry average would have put Coach’s beta below that of value retailer Target’s (1.06) which does not accurately reflect the nature of Coach’s risk in this recessionary economy. The mean of the industry average (0.84) and the individual beta (1.73) was taken and used in the DCF. This mean number was approximately 1.30. This number seems appropriate for a company producing high end products. As modified the results are indicated in the table below:

Current Price (3/12 close) $38.27FCFF FCFE

Cost of Capital 10.96% 11.10%Terminal Growth Rate 3.5% 3.5%Debt $25.076 MDCF $11.128 B $11.283 BShares Outstanding $317.8 M $317.8 MValue per Share $35.05 $35.54

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Some of the important assumptions that I made were revenue growth of 3% in the first couple of years that gradually made its way to 5% at year 5 of my valuation. This is primarily because I see the company’s growth at least slightly exceeding inflation over the next couple years and then gradually increasing as the economy gets stronger. The company’s expansionary goals almost ensure that there will be at least 3%-5% revenue growth over the next 5 years. I also have SG&A and COGS remaining stable as a percentage of revenue over the first couple of years and then gradually decreasing as a percentage of sales as the economy improves. Even with these somewhat optimistic forecasts the company’s stock appears to be a bit overvalued. The intrinsic value under the Free Cash Flow to the Firm model was $35.05 while the value was $35.51 under the Free Cash Flow to Equity model. This approximate valuation of $35.00 is a bit below the current share price of $38.27. This appears to be an appropriate beta number as Coach’s stock had been hovering between $34.00 and $37.00 for several months. However, if Coach’s individual beta were to be used the intrinsic value of Coach stock would be significantly lower. Using Coach’s beta of 1.73, the intrinsic value of Coach stock was calculated at approximately $28.00 using both FCFE and FCFF. This is over $10.00 below the current share price. Regardless of the beta number used this stock appears to be overvalued. This quantitative indication of value leads me to conclude that Coach’s stock price exceeds its intrinsic value and that it is currently time to sell this stock and seek alpha elsewhere.

Conclusion

The overriding factors in the decision to sell Coach stock are its high price relative to its intrinsic value and the highly unfavorable current market conditions for luxury brands. In looking at the SWOT analysis the weaknesses and threats outweigh the strengths and opportunities with regard to the stock sell decision. The SWOT illustrated the solid financial position as well as the highly regarded operating history of this company. Coach has solid financials as of the 4th quarter of 2009 as its total debt/equity ratio is 0.013 and it has $1.1 billion in cash. The company is one of few luxury brands with increasing sales throughout this recession. The multi-tiered pricing structure appears to be keeping the company on an upward trend with regard to net sales numbers. However, the New Normal environment presents some significant challenges for Coach. The company is expanding in a time of economic uncertainty and same store sales, despite an increase in the 4th quarter of 2009, have otherwise declined since the 3rd quarter of 2008. Even more problematic are the company’s declining margins. The increasing reliance on factory store sales is a result of frugality pervading the economy and careful consumers purchasing fewer luxury items. If increasing sales through factory stores becomes a long term strategy rather than a temporary necessity then Coach’s brand image will be tarnished and its ability to generate superior margins, as it has done in the past, will be diminished. The other major factor in the decision to sell Coach is its stock price being greater than its intrinsic value. According to the DCF analysis the value is at approximately $35.00 relative to a market price of $38.27 as of Friday March 12th. This is a significant discrepancy and indicates that Coach shares are overvalued. Coach stock thrived last year and exceeded its target value in October of 2009 after a 200% increase.

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It has wavered since then and it appears that there is not a lot of potential upward movement. The portfolio will benefit from selling Coach stock and purchasing shares in a company better positioned to thrive in this recessionary economy and that is currently selling below its intrinsic value.

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Appendices

Appendix 1: Coach stock over last 2 years

Appendix 2

Coach 2009 10k, p. 2

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Appendix 3

Coach 2009 10k, p. 65

Appendix 4: Year over year consumer spending on apparel in last three holiday seasons

4Q06/4Q07 4Q07/4Q08 4Q08/4Q092.2% -7.7% 1.8%

U.S. Census Bureau: Consumer Spending

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Appendix 5

Appendix 6

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Appendix 7: Past 4 years of Sales and Net Income illustrate declining margins (in billions)

2.112.61

3.18 3.23

0.49 0.64 0.78 0.62

0

1

2

3

4

2006 2007 2008 2009

Coach 2009 10k, p. 40

Appendix 8: Past 4 holiday seasons of sales and net income illustrate declining margins (in billions)

0.810.98 0.96

1.07

0.23 0.25 0.22 0.24

0

0.2

0.4

0.6

0.8

1

1.2

Q406 Q407 Q408 Q409

10Q Data per SEC.gov

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Appendix 9: Coach stocks performance relative to peers and S & P 500

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Coach Sell Aster Winter10