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Wall St. Sees Long Climb for Coach

The company's shares continued their slump on Friday, as analysts weighed in with concerns over its turnaround strategy.

Shares of Coach Inc. continued their slump, hitting a fresh 52-week low on Friday, as Wall Street analysts weighed in with their concerns over the company’s turnaround strategy.

Coach on Thursday held its investor day meeting to discuss its brand transformation that includes shuttering 70 North American full-price stores and changing its outlet business. Head designer Stuart Vevers’ first collection is set to reach sales floors in September.

While Wall Street overall liked the product they’ve seen so far from Vevers, their conclusion for investors was to either hold or wait until there’s better visibility on the effectiveness of the turnaround strategy.

Faye Landes at Cowen & Co. has a “market perform” rating on Coach shares, noting that the stock “likely trades sideways for some time.…If the turnaround, as we hope, does take place, there will likely be plenty of time to jump into the stock and participate in the upside.”

According to Landes, “We can’t assess yet if Coach’s efforts will bear fruit as there is no real precedent.…While there may be some points of light during the next several quarters, we think it’s well into [fiscal year 2016] before there are real signs of a turnaround.”

Joan Payson of Barclays Capital Inc. lowered her price target to $34 from $45, noting that while Coach’s initiatives are a step in the right direction, “execution will take time given the scale of the distribution network.” She added that Coach could benefit from easing comparisons and expansion of underpenetrated categories such as men’s, footwear and apparel, but said risks were that the accessories market has become more competitive and promotional, not to mention the company’s still-growing store network and concentration in outlets.

Randal J. Konik at Jefferies, who has a “hold” rating on the stock, said that while “we like what we’ve seen [of] Vevers’ product launches planned for September, executing a significant transformation will likely take at least several quarters to ramp up, and quite frankly, visibility on its success is low at this point. In the meantime, market share losses and restructuring costs will continue to hurt results.”

Konik concluded that it is too early to “get bullish on Coach shares.

Paul Lejuez of Wells Fargo Securities, who has a “market perform” rating on Coach, said that “Coach is attempting something very difficult in trying to transform its brand, reduce promotions and attract new customers.”

Lejuez wasn’t convinced that management could create a “luxury halo around the brand. The difficulty in doing this is that we do not expect the more luxury customer will be as interested in Coach as Coach is in them. The company is also attempting to be less promotional overall, particularly in its factory stores, where we think this strategy will be even more challenging.”

He concluded that caution was the watchword regarding Coach’s “ability to pull off its brand transformation at this stage of its life cycle.”

Morgan Stanley’s Kimberly C. Greenberger has a price target of $29, with an “underweight” rating on the stock, given in part to heavy turnaround costs. She said, “In our view, Coach is a fading brand story, and brand repositioning will require three to five years.…We believe Coach’s product strategy is sound, but remain cautious on overdistribution through factory outlets. Plans for brand elevation will likely take years to play out. Rising cost pressures, increasing supplier power, rising payroll and annual rent in Asia pressure margins.”

Shares of Coach ended Friday’s session down 2.7 percent to $34.73. Its shares have lost 37.2 percent of their value this year.