Coach Is Extending the Brand into New Geographies

In this article, let's take a look at Coach Inc. (COH, Financial), a $11.97 billion market cap company, which designs, makes and markets fine accessories for women and men, including handbags, weekend and travel accessories, outerwear, footwear, and business cases.

Promising regions

The company has two reportable segments, North America and International. The international business is still below the maximum potential. Promising regions, like the Japanese market, is still waiting for a good growth. With little growth in the past 10 years, we believe it could offer American styles with high-quality at attractive prices.

Another country with a good growth potential is China. We expect the company could reach higher operating margins in the future. Further, the firm penetrated in Europe in 2012 through department store partnerships and now focuses on wholesale accounts while opening retail stores, that today we think it has a small number of them.

Competitive advantages

Coach has a strong recognition of its brand that could offset possible future changes in tastes and preferences of consumers. In bags and leather accessories, the brand impacts in a stronger way.

Revenues, margins and profitability

Looking at profitability, revenues declined by 14.11% and led earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.66 vs $1.66). During the past fiscal year, the company reported lower earnings of $2.78 versus $3.62 in the previous year. For the next year, Wall Street is expecting a contraction of 32.4% in earnings ($1.88 versus $2.78).

The net income has decreased by 38.3% when compared to the same quarter one year ago, from $297.44 million to $183.50 million.The net profit margin of 12.65% is ranked higher than 95% of the 1,273 companies in the Luxury Goods industry.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 23.31% which is higher than the industry median. Also, it is higher than the ones exhibit by Gildan Activewear (GIL, Financial), Lululemon (LULU, Financial) and Carter´s (CRI, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So the company has a very good ratio as well as Fossil (FOSL, Financial). It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 20.2x, trading at a discount compared to an average of 26.7x for the industry. To use another metric, its price-to-book ratio of 4.5x indicates a premium versus the industry average of 2.40x while the price-to-sales ratio of 2.6x is above the industry average of 0.92x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $13.238, which represents a 5.8% compound annual growth rate (CAGR).

Final comment

Coach plans to open stores in key markets across the world. Asia and Europe of course are key market for the firm and we hope it could gain market share in other regions.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) bought the stock, while Caxton Associates (Trades, Portfolio), Jim Simons (Trades, Portfolio), David Rolfe (Trades, Portfolio), John Buckingham (Trades, Portfolio), David Dreman (Trades, Portfolio) and Dodge & Cox have added this stock to their portfolios in the fourth quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned