Is Coach Inc.’s Advantage in Luxury Handbags Sustainable?

Introduction

Strategic analysis is highly situation-specific. Every company operates in a different environment. Thus, there is no one best strategy. This paper will examine several of Coach Inc.’s operational characteristics to verify their strategic implications. Financial analysis will show the current financial state of Coach Inc. and the impact of this on the current strategy. The Financial analysis will be done primarily through ratio analysis. A SWOT analysis will show the strategic capability of Coach Inc. by examining the internal strengths and weaknesses versus the external threats and opportunities. The Company situational profile prospectus will integrate all areas of this analysis.

Financial Analysis

Profitability ratios show how well the company is doing about its profits. They indicate the percentage of revenue earned that is available for further investment. This revenue can be used to meet operating expenses. The profits are related to the capital employed to earn them. In this analysis, financial data for 2006 is compared with the industry average. Coach Inc seems to be on the right track with the two profitability ratios calculated showing gradual improvement. The gross profit and Net Profit are both slightly above the industry average, an indication that Coach Inc is doing better than most of the industry players. The Gross Profit Margin is 0.77 whereas the industry average is 0.49. The Net profit margin is 0.23 while the industry average is 0.11. This shows the gain after taxation per dollar. Coach Inc is doing better than industry players in both cases. The question would be for how long it can continue doing this. (Gamble and Thompson, 2009).

Profit Margin has also improved to 17% from 13%. What this means is that Coach Inc. has managed to lower its cost of sales. This is consistent with its cost leadership strategy. Asset turnover has also increased from 1.6 times to 2 times, implying that the company’s assets are being better used to generate sales.

Liquidity analysis shows whether the company can meet its short-term financial obligations as and when they occur. Two ratios are computed for this purpose. The current ratio is 2.85while the industry average in the retail sector is 3, a sign that Coach Inc. increased its current liabilities without a corresponding increase in current assets. This could be detrimental in case demand surges, as the company would have insufficient working capital to meet this demand. The quick ratio is also lower than the industry average, being 2.17 while the industry average is 2.2. This is expected, given that the current ratio had also declined. The inventory turnover days increased from 152 days to 157 days. This implies that Coach Inc is taking 5 more days to sell its inventory than before. This trend may be due to increased competition and should be carefully monitored together with all the other liquidity ratios.

Leverage analysis examines the debt characteristics of the company in question. It considers how much debt burden the company has and the implications. The three ratios computed for this purpose are debt ratio, capital gearing, and operational gearing. The debt ratio shows an improvement, declining from 3.3 to 2.7. This may be because Coach Inc repaid some of its long-term debt without replacement or increased its assets more than the increase in debt. Either way, this is positive. The capital gearing has increased from 12% to 15% indicating that the amount of debt in the company’s long-term capital structure has increased. An increase in money owing comes with amplified financial risk which raises the company’s cost of equity. Coach Inc has to monitor this increase to ensure it remains within acceptable limits (Gamble and Thompson, 2009).

The inventory percentage shows how efficient the company has been in the administration of its stock. For Coach Inc., the ratio has shown a slight decrease meaning their inventory management has improved. The sales/total assets ratio relates a firm’s sales to its total assets. Coach Inc has shown an improvement from 1.3 to 1.5. This indicates that they have achieved more sales relative to their assets.

In conclusion, Coach Inc looks financially sound. The profitability ratios are quite promising. The company seems to have the capability to earn profits over its costs incurred. In terms of liquidity, the ratios have declined slightly, but this may be a general industry trend. Further data is needed to conclude, but in its absence, Coach Inc seems to be doing fine. However, in terms of leverage, the increasing levels of debt need to be looked into. Excessive debt would cease to be beneficial and result in increased bankruptcy risk.

SWOT Analysis

Strengths
  • Innovative culture, introduction of new designs frequently.
  • Profitability
  • Low cost production
  • Beating Competitors price by 50%
  • Outsourcing to cut costs
Weaknesses
  • Declining liquidity
  • Increasing leverage
Opportunities
  • High demand for luxury goods in US and Japan.
  • International market
Threats
  • Competition
  • Changing customer tastes
  • Counterfeit goods

Coach Inc has several internal strengths that would contribute to making its advantage sustainable. The company’s innovative culture which enables it to develop new designs frequently is a core competence and also an advantage over slower competitors. Its current profitability is also an advantage as it can afford to expand into other operations while growing shareholders’ wealth. Coach Inc has also excelled in low-cost production. This increases the sustainability of its strategy. The company has also established several distribution channels, ranging from full-priced stores, company stores, and internet catalogs. Additionally, Coach Inc has established strategic alliances to enter the luxury markets of watches, footwear, glasses, and men’s wear. Finally, the prices Coach Inc sets beat competitors’ prices by 50% (Gamble and Thompson, 2009).

The weaknesses of concern are the company’s declining liquidity and increasing gearing as revealed by the financial analysis. The aggregate effect of these two if unchecked is potentially large enough to jeopardize the company’s operations. Declining liquidity will also strain the relationship with creditors and suppliers. Increased gearing may make the company’s stock unattractive to risk-averse investors. The Factory stores are also out-performing the full-priced stores. This causes Coach Inc to lose on the extra mark-up on the goods not sold in the full-priced stores. The luxury brand is also losing its exclusiveness with the increased growth of factory outlet stores.

External opportunities include the high demand for luxury goods in Japan and US where Coach Inc operates as mentioned in the strategic issues. The company can create new products to satisfy this market while retaining profitability due to its low-cost production. There is also an unlimited international market yet to be tapped. This can be done through e-commerce as the world is rapidly becoming a worldwide community. The wealth of global consumers in Mexico, Australia, the Middle East, and Asia is also rapidly growing. Coach Inc. has a chance to grow its revenues in these countries.

The major threats to Coach Inc are competitors and the fast-changing consumer tastes and preferences. Companies such as Gucci, Prada, Louis Vuitton, Dolce & Gabanna, and Ferragamo produce similar products. Competitors could be in the same industry or producers of substitute products. Counterfeiting of luxury goods is also a major threat. This cost the industry a total of $ 500B of goods sold throughout the world last year. Porter’s Five Forces analysis shows how much power the luxurious consumers wield.

Company Situational Profile and Prospectus

This section is a summary of the strategic prospects of Coach Inc. and its plans. The industry Coach Inc. operates in a volatile market and it depends highly on the shifting tastes of the customer. However, Coach Inc. has already established a niche of customers for itself in the low-end market as it is a low-cost producer. Coach Inc. is also profitable. The company’s strategic prospects look good provided the financial weaknesses identified in the SWOT and Financial analysis are kept in check, and the external threats countered.

Reference

Gamble, J. E., & Thompson, J. (2009). Essentials of Strategic Management: The Quest for Competitive Advantage. New York: Paperback.

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NerdyTom. (2022, January 6). Is Coach Inc.’s Advantage in Luxury Handbags Sustainable? Retrieved from https://nerdytom.com/is-coach-inc-s-advantage-in-luxury-handbags-sustainable/

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"Is Coach Inc.’s Advantage in Luxury Handbags Sustainable?" NerdyTom, 6 Jan. 2022, nerdytom.com/is-coach-inc-s-advantage-in-luxury-handbags-sustainable/.

1. NerdyTom. "Is Coach Inc.’s Advantage in Luxury Handbags Sustainable?" January 6, 2022. https://nerdytom.com/is-coach-inc-s-advantage-in-luxury-handbags-sustainable/.


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NerdyTom. "Is Coach Inc.’s Advantage in Luxury Handbags Sustainable?" January 6, 2022. https://nerdytom.com/is-coach-inc-s-advantage-in-luxury-handbags-sustainable/.

References

NerdyTom. 2022. "Is Coach Inc.’s Advantage in Luxury Handbags Sustainable?" January 6, 2022. https://nerdytom.com/is-coach-inc-s-advantage-in-luxury-handbags-sustainable/.

References

NerdyTom. (2022) 'Is Coach Inc.’s Advantage in Luxury Handbags Sustainable'. 6 January.

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