Here's why Sitoy can't afford to lose Coach

Coach’s better-than-expected 1Q should help remove the tail risk of investing in Sitoy, says CIMB.

According to CIMB, the solid 1Q results of Coach following a string of warnings about China from luxury competitors like Tiffany and Burberry seem to suggest that Coach’s accessible luxury position (price points are 40-60% below average European luxury brands) is less sensitive to macro pressures.

Here's more from CIMB:

Coach, Sitoy’s largest customer (48% of sales in FY12), reported 1Q13 (July-Sept 2012) EPS of US$0.77 (+5.5% yoy), surpassing consensus estimate of US$0.75.

Key highlights include: 1) sales increased 11% yoy to US$1.16bn; 2) total North American sales jumped 8% yoy with direct sales up 11% and SSSG up 5.5% (vs. 1.7% in 4Q12); 3) international sales rose 15% yoy, including a rise in China sales of 40% yoy driven by double-digit SSSG, and 4) the operating margin fell 2.1% pts yoy to 28.6% as long-term growth investments, notably in Asia (acquisition of distributors in Malaysia and Korea), hit profitability levels.

During the quarter, Coach introduced its Legacy line, inspired by its archives of classic leather goods, which it called its most significant product debut since 2001.

Post 1Q results, Coach’s share price rose 7.4% on Tuesday.

The results should help to remove the tail risk of investing in Sitoy given the earlier concerns of a major slowdown in Coach. We have built in a slowdown scenario in FY13 (10.4% earnings growth vs. 27% in FY12).