Buy Coach On Market Overreaction

Jan.23.13 | About: Coach, Inc. (COH)

Coach (NYSE:COH) shares plummeted over 15% today after the company announced sluggish North America sales over the holiday season. For long term investors, this overreaction represents an attractive opportunity to buy into Coach's international expansion, its growing presence in the men's market, and its impressive product innovation.

International Growth:

The market appears to have focused primarily on the fact that North American sales, which represent 63% of Coach's overall revenue mix, increased just 1% year over year. While this is notable, it's also important to point out that Coach's biggest growth opportunity will be its performance abroad. Led by China, where Coach opened 13 new stores this quarter, international sales grew 12%. The rise of China's middle class provides ample demand for this expansion, and I expect this growth story to continue in the coming quarters.

Expansion into Men's Market:

Today's 15% loss also overshadowed Coach's expansion into the Men's market. Traditionally, the Coach brand name does not elicit images of male shoppers. But Coach's recent focus on this demographic has already begun to pay off. During today's earnings call, Coach CEO Lew Frankfort expressed confidence that the Men's business is on track to generate sales of over $600 million globally in FY13, up 50% on the year. In FY12, North American sales of men's bags and accessories doubled, and all signs point to this trend continuing down the road.

Impressive Product Innovation:

Last year, 71% of Coach's net revenue mix came from newly introduced products, meaning products that didn't exist the year before. Take a second to let this sink in - this is an incredible statistic. When you combine this product innovation with Coach's sticky customer base that comes from its well-regarded brand name, it is evident that the company is pursuing for growth avenues rather than resting on its laurels. As macroeconomic headwinds cause consumer spending slumps like we saw this holiday season, this product differentiation will be more important than ever and will help Coach outpace its peers.


Looking back at the second quarter, it's certainly important to keep an eye on Coach's sluggish North American sales. The tepid growth was primarily due to Coach's reluctance to mark down its products over the holiday season, and with the fiscal cliff on every consumer's mind, many shoppers opted for bargains over luxury. In response, the management team mentioned today that they were going to ramp up promotional activity over the next quarter.

Today's nosedive of Coach shares offers investors an extraordinary opportunity to buy a quality business at an attractive price. The company recorded impressive results in a growing Chinese market, while its men's business line took off. With these opportunities facing a company that has managed to thrive during the ups and downs of the past few years, is it really justified that the market erased over $2 billion of Coach's market share today?

Disclosure: I am long COH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.