UPDATE: Morgan Stanley Downgrades Coach (COH) to 'Underweight' as Analyst Questions Turnaround

(Updated - September 14, 2016 11:20 AM EDT)

Morgan Stanley downgraded Coach (NYSE: COH) from Equalweight to Underweight with a price target of $32, implying downside of 12%. Analyst Kimberly C Greenberger said analysis suggests its "turnaround" is being achieved in an unhealthy manner.

"Our definition of a turnaround is sales growth with stable margins or stable sales with margin improvement, however Coach has not proven it can deliver either of these," said Greenberger. "Promotional activity in the outlet channel steadily increased throughout the fiscal year, concurrent with improving comps."

The analyst continued, "In the 'turnaround' fourth quarter specifically, -300+ bps of merchandise margin decline due to increased promotional activity, primarily in the outlet channel, was required to achieve a flat outlet comp (+2% N. Am comp) leading 4Q gross margin -140 bps y/y and gross profit dollars -$5M y/y (ex. the 53rd week). For the fiscal year as a whole, North America gross margin declined -210 bps and ex. the 53rd week, gross profit dollars declined ~-$123M y/y. In fact, Coach has not grown North America gross profit dollars in a single quarter since the company began disclosing it three years ago."

Greenberger added, "International gross profit and operating income dollars are growing +L-MSD, but investors are paying for a North America turnaround, not an international one. We do acknowledge there appears to be a genuine full price turnaround in the North American full price channel, with positive comps and lower discounting levels, however at no more than ~20% of total global revenue, it is unfortunately not big enough to matter."

The bank's bull case on Coach is $32 and its bear case is $22.

For an analyst ratings summary and ratings history on Coach click here. For more ratings news on Coach click here.

Shares of Coach closed at $36.29 yesterday.

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