The Manzere

A recent note from the Vampire Squid highlights a compelling potential new area of growth for mature brands:

“Men are becoming increasingly important consumers of apparel and accessories. We see multiple secular factors spurring growth: (1) Interest in the category is growing – particularly among “Millennial” male shoppers. (2) Men are trading up – driving strong growth in aspirational and luxury segments. (3) Men gravitating to branded accessories – a strong electronic product cycle is driving increased penetration in tablets and smart phones, creating a need for men to find a better way to transport and protect electronics. Fashion forward men in Asia and men’s luxury players in Europe have established a global opportunity, but we remain particularly compelled by emerging domestic trends in the space.”

Store Count

Men’s accessories are expected to grow 15%, outpacing women’s in 2013, per Goldman.  Men’s sales growth of those specialty retail concepts pursuing a standalone men’s strategy (Chart Above: JCG, COH, TUMI) reveals the category has substantially outpaced total company growth since 2009. We are particularly interested in this opportunity as it relates to Coach (COH), and think the company is well positioned to capitalize on growth in the male market, as we discussed in our recent report on the stock, picked up at Market Folly last week.  A few highlights from our report follow.  The full report is available here.

“Importantly, the male market is increasing the overall size of the lifestyle brand, and represents a significant opportunity for expansion at Coach, which is pushing hard into the estimated $5 billion market. Fashion conscious men in countries such as China, Korea, France and the UK are where growth is strongest. In contrast, the US male population is less accustomed to a fashionable dress code, but it’s a trend that has been reversing. While we have yet to see a broad uptake of “murses” in Lenoir, North Carolina, today, men make 41% of luxury purchases, up from 35% in 1995. The male market is expected to expand at a low double-digit pace for several years ahead, and Coach believes its men’s sales could hit $1 billion in the next few years.

“Coach continues to expand their men’s line through enhancements and additions to clothing, accessories and bags. Exposure is being driven by dual gender stores that are being rolled out with store upgrades and to new stores with a third of their domestic stores outfitted as such. Reach has also been aided by a targeted marketing campaign in the US, China and Japan. Management expects revenues in Men’s to reach $600 million this year, 50% growth from prior year, representing 10% of total revenues.”

Bottom Line: Coach has several early-stage growth opportunities to compliment its dominant, more mature domestic operations.  The resulting top-line growth and share buybacks should drive double digit earnings growth for the foreseeable future.  Furthermore, we believe the company’s industry-leading return on capital and strong free cash flow generation provide plenty of room to return more cash to shareholders through a significant dividend increase. If we assume that Coach ultimately trades back towards its average forward multiple of 15x over the next three years, we estimate the stock is worth $76.60 in our base case, which represents more than 50% upside potential. In our bull case, upside is significantly greater.  But that still leaves one question left unanswered: 

Hey George, What do You Like Better: The Bro or The Manzere?  Click here to find out.

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Off to Dallas this afternoon for meetings through Wednesday.  Drop me a line if you are in the area and would like to catch up.  I’m hoping to connect with a trendy new hand bag designer while out west – not sure how she feels about The Manzere, but we’ll be sure to let you know.