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Coach Inc. (COH) - Why You Might Want to Take a Second Look - What’s in the Bag?
Posted by: Victor Selva (IP Logged)
Date: December 10, 2013 05:29PM

Founded in 1941 and based in New York, Coach Inc. (COH) is a luxury designer and marketer of fine accessories and gifts for women and men. The company owns and operates full-priced retail and outlet store locations in the U.S. and internationally. It utilizes distributors to help expand their brand presence around the globe and runs e-commerce websites in over 24 countries. However, and in spite of all these efforts, Coach’s shares have lagged the broader market over the past year. Coach disappointed on the sales front that fell 1.1 percent, after increasing 6 percent during fourth quarter fiscal 2013, as a consequence to its idleness in the North American market. Furthermore, the company’s shares remained flat in relation to the prior-year quarter, at 77 cents each. In addition, several analysts have qualified the stock as a “sell” case. Some people say it’s time to do that, but is it really? Let’s take a closer look before rushing a decision.

Why So Flat?

Being a luxury fashion purveyor, the company has been challenged by new and fierce competitors – such as Michael Kors (KORS) and Kate Spade. Although it is a well-established brand, its tenure as a market leader is not immune to new entrants. As a consequence, Coach’s North American business (which consists of 68 percent of net sales) suffered a slight decrease. Recession, also, has not been a friend to sales as its customers tend to be more “aspirational,” and are, hence, more sensitive to macroeconomic factors.

It has also been pointed out that, as Coach has embarked itself upon a transformation into a global lifestyle brand, it may be damaging its core business. As it broadens its product offerings, Coach may dilute its core handbags and accessories brand. Customers are very brad-loyal in the handbag and accessories category and thus, while expanding, Coach is running the risk that changes in tastes and preferences will eventually lead to consumers turning elsewhere. Also, although other brands – mainly European – have been successful offering a broader line of products, Coach’s brand is unfortunately not in the same league as century-old luxury icons.

What’s Really in the Bag?

Coach may be non-European, but it is a century-old (almost a century, actually), strong, recognizable brand. Over the years, the company has survived changes in management, recessions, and competitive threats and the brand has evolved through numerous faces of growth – and it may be having a new one in the form of a new CEO and its expansion into a global lifestyle brand. Furthermore, the word “Coach” itself conjures images of luxury bags. This has given the company the ability to price at levels above lesser brands, but where consumers still see value.

And don’t forget about Coach’s strong international position, which accounts for 32 percent of its sales, and where its success has only just begun. There, its sales grew by 9.9 percent this year - 15.8% when not taking in consideration the devaluation of the yen. Besides its presence in China and Japan- where the company proved it can compete effectively with European leather goods makers and gain share- Coach has just decided to take its first steps into Europe.

On top of all, and more importantly, Coach has very strong numbers along a low business valuation compared to other luxury goods companies, which makes it a great buying opportunity. In fact, Coach ranks as one of the best cash-generating consumer companies: over the past ten years, sales-per-share growth has averaged about 20 percent per year.

When the Timings Looks Right…

Despite this year’s setback on sales, Coach’s sales, earnings, cash from ops, free cash flow and net worth have all been growing firmly. It seems that the problems plaguing this company are only temporary in nature, and should not deceive a good investor’s eye.

Truth is, due to these issues, shares are now priced at an attractive valuation (see table below) for a potentially lucrative long-term investment. In fact, several investment gurus seem to have recognized this potential over the past few months: prominent investors, from Jim Simons to Joel Greenblatt and Steve Mandel, upped their positions in the company over the past quarter.

Company (Ticker) Coach (COH) Ind. Avg. Michael Kors (KORS)
P/E 15.5 21.6 32.8
Operating Margin 29.9 19.9 29.8
Net Margin 20.4 13.0 19.2
ROA TTM 31.1 16.4 35.5
ROE TTM 47.2 27.3 46.4
Source: Morningstar

Disclosure: Victor Selva holds no position in any stocks mentioned.



Guru Discussed: Jim Simons: Current Portfolio, Stock Picks
Joel Greenblatt: Current Portfolio, Stock Picks
Stocks Discussed: COH, KORS,
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