If you bought Coach (COH, Financial) stock July 25, 2005, you paid $36 at the open and $34.94 at the close. Today, the stock sits under $31 and while they have paid out $4.71 in dividends, after taxes, you are flat and your money is kicking you for it.
Despite growing its revenue by 181% from $1.7 billion to $4.3 billion, accumulating over $7.4 billion in net income, more than tripling its book value, and buying back over 25% of the outstanding stock, the market value has gone exactly nowhere.
Some may say that it’s only a matter of time before the market value catches up to the economic growth. Others may point to Walmart as a similar example of a retailer that was dead money for a decade until Buffett started buying.
If you’ve been out of the consumption limelight, here’s a breakdown of Coach. The company is a New York design house of modern luxury accessories and lifestyle brands. Its product line include women’s and men’s bags, accessories, business cases, footwear, wearables, jewelry, sun wear, travel bags, watches and fragrance. The pride of a Coach bag can be seen on women’s arms everywhere. Yet, to me it’s getting more mainstream, forcing the company to cut margins and over the next few years accept lower earnings.
Here’s what happened: A ton of high end luxury brands came out of the shadows and a ton of new high quality brands came to market. And, while Coach used to be one of the best luxury brands, it’s become more common. According to research group Millward Brown and advertising conglomerate WPP, Coach isn’t even in the discussion.
Top Luxury Brands in 2015
- Louis Vuitton
- Hermès
- Gucci
- Chanel
- Rolex
- Cartier
- Prada
- Burberry
- Michael Kors
- Tiffany
Download the new 2015 Report and Ranking @
http://www.millwardbrown.com/BrandZ/2015/Global/2015_BrandZ_Top100_Report.pdf
Of course, this hasn’t stopped guru investors from getting involved in the stock. Brian Rogers (Trades, Portfolio), David Rolfe (Trades, Portfolio), John Rogers (Trades, Portfolio), Dodge & Cox, and Joel Greenblatt (Trades, Portfolio) (who owns everything it seems) own a stake in Coach.
Yet, even from an future price potential standpoint, the stock doesn’t have the reward for the risk, despite trading down 11% in the last 52 weeks. If you were trading based on the chart, you might see a rebound in the short term, but if you’re looking for this one to produce anything over and above the 4.3% dividend, you’ll be very disappointed in my estimation.
- Margins have shrunk 13% and will continue to do so
- Operating margins have been cut in half
- To keep up, they will have to spend more on SG&A
- Book value growth will not add value to the share price
I could be completely wrong, and Coach might be a great value. The company does have a very narrow economic moat and when I first started to look into Coach, I was thinking about buying it, but then I remembered Buffett’s rule on retained earnings.
In 1984, Warren made these comments:
“Unrestricted earnings should be retained only where there is a reasonable prospect – backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future – that for every dollar retained by the corporation, at least one dollar of market value will be created for owners.”
When I look at Coach, the stock has a lot of catching up to do and I can’t make a rational argument that it will. They have done very well in managing the financial engineering on the financial statements, but that has yet to translate into higher market values. At 20x profit, the stock is a $40 number. That doesn’t exactly scream bargain.
So unless I see a major revitalization in the value and loyalty of the brand or a major push into markets where they haven’t dare tread, then this stock doesn’t offer enough potential returns to warrant a high margin of safety.
