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Taking the High (End) Road
Posted by: Dr. Paul Price (IP Logged)
Date: March 29, 2013 09:00AM

Tiffany (TIF), Coach (COH) and Michael Kors (KORS) are major players in the luxury segment of retailing. KORS has only been publicly traded since December 2011. TIF and COH have long, very successful track records.

You might expect that the performance of these three stocks would parallel each other. In fact, the present valuations are widely disparate. For smart shoppers this may spell opportunity.

Comparing these companies is complicated because they each use different fiscal years. Tiffany’s FY ends around Jan. 31 of the following year. Coach closes its books on the Saturday nearest June 30. Kors totals up near March 31 of the next calendar year. For clarity in this discussion I’m going to use my best guess as to apples-to-apples comparisons for the 12-month period ended around Jan. 31, 2013.

As of Jan. 31, 2013 Tiffany had earned about $3.25 per share, Coach’s EPS were about $3.62 and KORS came in at around $1.83 per share. Market pricing placed their current valuations as follows:

Traders are paying up for KORS while getting no dividends. Investors are shunning Coach even with a modest multiple and a decent yield. TIF falls right between those two extremes. Surprisingly, the two companies with publicly available, long-term results would suggest investors have gotten things mixed up.

Coach shareholders benefited from the huge profit surge.

It seems inexplicable that today’s investors prefer TIF to COH and award it a 54% higher P/E. Michael Kors premium valuation is easier to understand. KORS’ pro forma EPS were $0.40 in fiscal 2010. Profits almost doubled to $0.78 in 2011. Earnings are expected to be $1.86 when fiscal year 2012 is reported for the period ending March 30, 2013. A further 59% increase is now forecast for fiscal year 2013.

True believers in KORS feel the shares are not overpriced at 23.1x next year’s projection of $2.45 per share. Bargain seekers should be more attracted to Coach than Tiffany & Co.

The only time Coach traded cheaper, according to its valuation, than today was near the exact nadir in 2009. It paid no dividend back then. Shareholders were about to embark on an almost 600%, three-year move up. Today’s 2.4% yield is unprecedented. The trailing P/E of 13.8x is a lower starting point than those that launched huge rallies in 2003, 2006, 2010 and 2011.

All three of these companies are financially sound and highly profitable. Michael Kors is the fastest grower of the trio but its shares already reflect nothing but good news. Tiffany had a down 2012 yet is priced for growth. Coach had an all-time record fiscal year but is currently out of favor.

I bought both TIF and COH last summer when they sold off. I’m satisfied with my Tiffany gain and am planning to let TIF go via covered calls that expire on April 19. If Coach remains around $49 to $50 I’ll be using those proceeds from my TIF gains to increase my COH position.

Even a lower than historically typical P/E (for Coach) on the fiscal year 2014 consensus projection of $4.14 could support a 12-month target price of $65 to $75. That’s 30% to 50% above the current quote yet lower than was actually achieved early in 2012.

Disclosure: Long COH, Long TIF, short TIF covered calls.

Stocks Discussed: COH, TIF, KORS,
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Taking the High End Road
Posted by: Cornelius Chan (IP Logged)
Date: March 29, 2013 02:48PM

Coach has an interesting history. The following part from 2012 annual report is fascinating in that slowly but surely the company has been acquiring back ownership in their various subsidiaries worldwide. Putting cash to good use? You bet.

Founded in 1941, Coach was acquired by Sara Lee Corporation (‘‘Sara Lee’’) in 1985. In June 2000,Coach was incorporated in the state of Maryland. In October 2000, Coach was listed on the New York Stock Exchange and sold approximately 68 million shares of common stock, split adjusted, representing 19.5% of the outstanding shares. In April 2001, Sara Lee completed a distribution of its remaining ownership in Coach via an exchange offer, which allowed Sara Lee stockholders to tender Sara Lee common stock for Coach common stock.

In June 2001, Coach Japan was formed to expand our presence in the Japanese market and to exercise greater control over our brand in that country. Coach Japan was initially formed as a joint venture with Sumitomo Corporation. On July 1, 2005, we purchased Sumitomo’s 50% interest in Coach Japan, resulting in Coach Japan becoming a 100% owned subsidiary of Coach, Inc.

In fiscal 2009, the Company acquired the Coach domestic retail businesses in Hong Kong, Macau and mainland China (‘‘Coach China’’) from its former distributor, the ImagineX group. These acquisitions provide 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.

In fiscal 2011, the Company acquired a non-controlling interest in a joint venture with Hackett Limited to expand the Coach International business in Europe. Through the joint venture, the Company opened retail locations in Spain, Portugal and Great Britain in fiscal 2011 and in France and Ireland in fiscal 2012. The Company currently anticipates further European expansion in fiscal 2013.

In fiscal 2012, the Company acquired the Coach domestic retail businesses in Singapore and Taiwan, which were operated by Valiram Group and Tasa Meng, respectively. In connection with the fiscal 2011 agreement with the Valiram Group, the Company assumed direct control of its domestic retail business in Malaysia in July 2012. Additionally, in connection with the fiscal 2012 agreement with Shinsegae International, the Company assumed direct control of its retail business in Korea in early August 2012.

Stocks Discussed: COH, TIF, KORS,
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Taking the High End Road
Posted by: Cornelius Chan (IP Logged)
Date: March 29, 2013 03:07PM

The company offers the following explanation for its durable competitive advantage:

A Distinctive Brand — Coach offers distinctive, easily recognizable, accessible luxury products that are relevant, extremely well made and provide excellent value.

A Market Leadership Position With Growing Global Share — Coach is a global leader in premium handbag and accessories. Each year, as our market share increases, our leadership position strengthens. In North America, Coach is the leading brand. In Japan, Coach is the leading imported luxury handbag and accessories brand by units sold.

A Loyal And Involved Consumer — Coach consumers have a specific emotional connection with the brand. Part of the Company’s everyday mission is to cultivate consumer relationships by strengthening this emotional connection.

A Multi-Channel International Distribution Model — This allows Coach to maintain a critical balance as results do not depend solely on the performance of a single channel or geographic area. The Direct-to-Consumer channel provides us with immediate, controlled access to consumers through Coach-operated stores in North America; Japan; Hong Kong, Macau, and mainland China; Taiwan; Singapore and the Internet. Beginning with the first quarter of fiscal 2013, this channel also includes Coach-operated stores in Malaysia and Korea. The Indirect channel provides us with access to consumers via wholesale department store and specialty store locations in over 20 countries.

Innovation And A Consumer-Centric Focus — Coach listens to its consumer through rigorous consumer research and strong consumer orientation. Coach works to anticipate the consumer’s changing needs by keeping the product assortment fresh and relevant.

We believe that these differentiating elements have enabled the Company to offer a unique proposition to the marketplace. We hold the number one position within the U.S. premium handbag and accessories market and the number two position within the Japanese imported luxury handbag and accessories market.

Stocks Discussed: COH, TIF, KORS,
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Taking the High End Road
Posted by: Cornelius Chan (IP Logged)
Date: March 29, 2013 03:19PM

Products as percentage of total sales:

Fiscal Year Ended June 30, 2012 July 2, 2011 July 3, 2010

Men’s & Women’s Handbags . . . . . . . . . . . . . . 65% 66% 65%

Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28% 27% 26%
(Accessories include women’s and men’s small leather goods, novelty accessories, women’s and men’s belts, women’s small leather goods, include money pieces, wristlets, and cosmetic cases, men’s small leather goods consist primarily of wallets and card cases, novelty accessories include time management and electronic accessories, Key rings and charms.)

All other products . . . . . . . . . . . . . . . . . . . . . . . . 7% 7% 9%
(All other includes wearables, footware, jewelry, sunwear, travel bags, watches and fragrances.)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 100% 100%

Stocks Discussed: COH, TIF, KORS,
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Taking the High End Road
Posted by: Cornelius Chan (IP Logged)
Date: March 29, 2013 03:39PM

Company insiders have been doing all selling and no buying.

Stocks Discussed: COH, TIF, KORS,
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Taking the High End Road
Posted by: Cornelius Chan (IP Logged)
Date: March 29, 2013 03:45PM

How is Coach doing internationally?

From the 2012 annual report [risk factors]:

We operate on a global basis, with approximately 32% of our net sales coming from operations outside the U.S.A.

However, sales to our international wholesale customers are denominated in U.S. dollars. While geographic diversity helps to reduce the Company’s exposure to risks in any one country, we are subject to risks associated with international operations, including, but not limited to:

• changes in exchange rates for foreign currencies, which may adversely affect the retail prices of our products, result in decreased international consumer demand, or increase our supply costs in those markets, with a corresponding negative impact on our gross margin rates,
political or economic instability or changing macroeconomic conditions in our major markets,
• natural and other disasters in international and other markets, and
• changes in foreign or domestic legal and regulatory requirements resulting in the imposition of new or more onerous trade restrictions, tariffs, embargoes, exchange or other government controls.

We monitor our global foreign currency exposure and in order to minimize the impact on earnings of foreign currency rate movements, we hedge our subsidiaries’ U.S. dollar-denominated inventory purchases in Japan and Canada, as well as Coach’s cross currency denominated intercompany loan portfolio. We cannot ensure, however, that these hedges will fully offset the impact of foreign currency rate movements.

Additionally, our international subsidiaries primarily use local currencies as the functional currency and translate their financial results from the local currency to U.S. dollars. If the U.S. dollar strengthens against these subsidiaries’ foreign currencies, the translation of their foreign currency denominated transactions may decrease consolidated net sales and profitability.

Stocks Discussed: COH, TIF, KORS,
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