Coach: Luxury on the Cheap

Source: Flickr by danperry.com

When the holiday shopping season is done for 2008, the results for retailers will show disappointing numbers. Consumers continue to pinch their pennies in this tough economic environment. The International Council of Shopping Centers expects November and December sales at stores open at least a year to fall as much as 1 percent, the largest drop since at least 1969, when the trade group began tracking such data [video].

However, there's beauty in those numbers for stock investors. While the industry as a whole has performed poorly operationally, some have weathered the storm quite well. But panicked investors have thrown the baby out with the bathwater, pricing the stock of strong companies below reasonable levels.

Take for instance luxury bag and apparel designer, Coach, Inc (COH). Year-to-date, Coach is down 34% right along with the Apparel, Accessory and Luxury Goods sector, which is down 37% as of December 19th. But the company has been around for nearly 70 years, a period which has seen at least 10 recessions. Certainly it has seen and weathered some bad times before. Since going public in 2000 it's done nothing but continue to strengthen the company.

According to Standard & Poor's:

For the five years through FY 08, COH exhibited a revenue compound annual growth rate [CAGR] of 27%, a gross profit CAGR of 29%, an EBIT CAGR of 37%, and a net income CAGR of 40%. Total assets grew at a five-year CAGR of 30%, and inventory at a modest 19% CAGR, attesting to a tight operating structure that reduces inventory risk.

The company also sports gross margins of 74%, the highest in the industry. Only Louis Vuitton (LVMUY.PK) comes close with gross margins of 64%.

Coach also holds a commanding lead in the luxury handbag market in the U.S. and is making strides in Japan with a market share 13% behind only Louis Vuitton's 30% share of the market. Coach sees promise overseas, especially in China. It expects the overall market to more than double in size over the next 5 years to more than $2.5 billion in annual sales, up from of $1.2 billion now.

Even in this difficult environment, Coach has increased sales 18 percent year-over-year has essentially no debt to speak of. Louis Vuitton on the other hand, has $4.5 billion in long-term debt and a total-debt-to-equity [TDE] ratio 52%. The industry's average TDE is 27% (Source: Reuters).

The bags may be expensive at Coach but the stock is cheap. In my humble opinion, a company that is able to perform like this even in bad times is deserving of more than the 9x trailing earnings it now fetches.

Disclosure: I and the clients of Brick Financial Management, LLC owned share of Coach at the time of this writing. But positions may change at any time.

Comments

[Paul Price:]

Coach, with a virtutally debt-free balance sheet and solid earnings looks like a great play at today's valuation.

When the economy eventually recovers COH should provide solid returns and there seems no chance of this one not surviving even a drastic downturn.

2008 Dec 25 10:59 AM

[Elita:]

However, Coach is competing in a very aggressive environment where high end retailers (Barney's, Bloomingdale's, etc) are having 50%+ discount on designer purses (with higher end brands than Coach), and brands like Kate Spade and Cole Haan have been discounting 30%-40% off everything or sale items being 50%+ off or more for the past month.

If a gal can get a half priced Prada wallet for $250 (which I saw at SF Barney's last month) or get a regular priced Coach wallet for $250.... I think she would pick Prada.

2008 Dec 25 04:44 PM

[notsosmart:]

if its so solid where is a nice yield?say 5-6%.LOL

2008 Dec 25 05:26 PM

[ChipSeal:]

You can know if you are in a depression by watching the cosmetics sector- It is the last consumer spending cut, and it takes more than a mere recession to clip it's sales.

2008 Dec 26 11:31 AM

[Duude:]

I'd have to agree with ChipSeal. Cosmetics? We'd probably see a bigger cut in food, electricity, and water before cosmetics.

2008 Dec 26 12:11 PM

[Glen Bradford:]

I like Coach Too. I think Paul's got alerts or something. I always find articles after him --- but I agree on the company. A side note, the girls I know like this brand called Juicy. I guess "Coach isn't as cool as it used to be, and everyone has it." High end retailers have been taken outside the biblical cities and stoned to death. Meanwhile, Walmarts and McDonalds have been living la vida loca. As I recall in business class, this happens in recessions, but in the long run, you want the high margin companies like Coach.

2008 Dec 26 09:59 PM

[Francorp:]

Hysterical, yes, my wife would cut the budget for food before her coach purses.

2008 Dec 29 02:04 PM