New Coach Name 'Tapestry' Seems Flat as New Coke, but the Stock Intrigues Me

 | Oct 13, 2017 | 12:00 PM EDT
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Last October, private prison operator Corrections Corp. of America announced that it was rebranding, changing its name to the kinder and gentler CoreCivic Inc. (CXW) . This change came at a time when private corrections were under great pressure, especially as the government was seemingly cutting ties and the expected winner of last year's presidential election railed against the industry.

Perhaps a more surprising name change was announced on Wednesday, when luxury handbag maker Coach Inc. (COH) announced a name change of its own, to Tapestry Inc. The move, designed to reflect the expansion of the company's brand portfolio, went over like a lead balloon, as shares dropped 2%. While the company has assured consumers that the Coach brand name will remain emblazoned on the company's handbags, so far this move appears to be a smaller version of the "New Coke" fiasco in 1985, when Coca-Cola Co. changed the formula of its flagship product. Perhaps we should call it "New Coach."

If the company, shares of which trade at about the same level they did 10 years ago, was seeking some of the attention it has lost over the years, perhaps this was a good way to do it. Perhaps the public outcry will convince the company to reconsider the name change.

Personally, the controversy spurred me to take a look at the name, which I had not done in years. The out-the-door lines I see year in and year out at one the company's outlet stores tell me that there still is great interest in the brand. Although when I asked my wife about Coach last night, she told me that  she has had two of their bags for 20 years (so they last), but did not seem at all interested in buying more (they are not cheap).

A business that had profit margins of 20%-plus as late as 2013 saw those margins cut in half by 2015. Margins improved to 13% last year, so this is certainly not a bad business. Currently trading at about 15 times next year's consensus estimates, the company is not the growth-darling, semi-cult stock it once was. However, it has morphed into one solid dividend payer, currently yielding 3.4%. The company initiated a quarterly dividend back in 2009 and increased it substantially from 7.5 cents to 33.8 cents in mid-2013. However, it has not raised that dividend since.

In May, the company announced the acquisition of upscale Kate Spade for $2.4 billion. The integration of that business into the Tapestry fold remains a wild card, and there have been analyst downgrades as the wait-and-see process continues. Part of the name change is likely due to that acquisition and perhaps is an indication that there will be more to come -- a tapestry of brands, if you will.

I'll give Coach, or Tapestry, credit that if it wanted to get back on the radar, it picked a very interesting way to do it. If nothing else, the stock looks intriguing and has been added to my watch list.

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