Coach is a leading American marketer of luxury lifestyle handbags and other fashion accessories for both men and women. It is one of the most well-known accessories brands in the U.S. and also maintains a presence in select international markets.

Coach competes with other premium apparel and accessories players like Polo Ralph Lauren, Liz Claiborne, and AnnTaylor, as well as high-end brands like Louis Vuitton, Hermes, Gucci and Prada.

Over the years, Coach has significantly increased its presence in international markets, with Japan being its prime success story. The Coach brand gained tremendous popularity in Japan at a time when standards of living were on the rise in the country. It successfully avoided direct competition with luxury brands like Louis Vuitton and Gucci, and “absolute” luxury brands like Hermes and Loro Piana by establishing itself as an “affordable” luxury player in a highly competitive market.

Today, Coach generates nearly 20% of its revenues from sales in Japan and has more than 10% share in the Japanese luxury handbag market. We now see a similar opportunity for Coach in China and envision potential upside to our $55.08 price estimate for Coach’s stock (which implies a slight premium to market price).

Saturation in the U.S. Luxury Handbag Market

Coach is the largest player in the U.S. luxury handbag market with close to 40% market share. While Coach’s aspirational luxury image has helped it attain the top position in the U.S., the company realizes that further growth in this region is limited. Coach estimates the maximum possible number of stores in North America (based on market potential) to be 500. With about 473 Coach retail stores already operating in the U.S., Coach has shifted focus to international markets to pursue its core growth strategy.

Also, the fact that the U.S. handbag market is highly correlated with macroeconomic conditions is not very promising for Coach. A slow recovery after recession and cautious consumer outlook has led Coach to increasingly shift strategy to international expansion, which on the other hand has been highly lucrative.

China Could Become a Huge Luxury Market

Luxury consumption in China has seen double digit growth in recent years as a result of rapid economic growth and rising standards of living in China. The Chinese market is expected to become the largest luxury market by 2014 comprising an estimated 23% of the world market, providing tremendous growth potential.

Seeing the potential in the Chinese market, Coach acquired domestic retail businesses in Hong Kong, Macau and mainland China (“Coach China”) from its former distributor, the ImagineX group, in fiscal 2009. [1] The acquisitions provided the company with greater control over the brand in China, enabling Coach to raise brand awareness and aggressively grow market share with the Chinese consumer.

As a result of its timely entry into the Chinese market and its “aspirational” luxury image, Coach has done extremely well in China over the last few years and witnessed a three-fold increase in China sales in fiscal 2010. Recently, the firm announced the opening of 25 new stores in China and now expects China sales to increase by 75% in fiscal 2011.

We estimate there could be an upside of 6% to our $55.08 Trefis price estimate for Coach’s stock if the number of Coach stores in China increase at a faster rate, reaching 250 by 2017, instead of our current forecast of 160.