S&P Assigns 'BBB-' CCR to Coach (COH); Outlook is Negative

Standard & Poor's Ratings Services assigned its 'BBB-' corporate credit rating to New York City-based Coach Inc. (NYSE: COH) and its proposed shelf registration for senior secured notes. The outlook is negative.

Coach has a leading position in the highly competitive premium handbag/accessories industry and good brand recognition, diverse geographic footprint with a meaningful international presence, despite its recent loss of domestic market share. Recent headwinds are the company's deteriorating operating metrics (North America same-store sales for example) because of weakened brand image and heightened competition from large and/or fast growing peers in the "affordable luxury" industry. We believe the company's transformational initiatives (including increased store capital spending, hiring a new designer, reducing promotions, and growing the men's brand) are necessary and will ease the negative trend over time as implementation continues in the next 12 to 18 months, but we also think the impact will be gradual. We also think there are risks associated with executing on these initiatives, including factors outside of the company's control in the form of strong competitors, and as a result, the timing of improvement remains uncertain. We assume some signs of execution improvement will occur in late fiscal 2015 (June year-end) or early fiscal 2016.

The negative outlook reflects our expectation that negative sales trends and margin erosion will persist in fiscal 2015, primarily because of continued competitive pressures and Coach's shifting promotional strategy, especially in North America. We believe the company's transformative initiatives (aimed at rebuilding its brand image) will ultimately begin to ease the negative trend over time as they are implemented in the next 12 to 18 months, but the impact will be gradual. We also think there are risks associated with executing these initiatives in light of competitors' growing market share and as a result, the timing and effectiveness of the turnaround remain uncertain.

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