Seeking Alpha
Profile| Send Message|
( followers)  

Is Coach (NYSE: COH) a has-been? We think the answer is definitely not. Although the stock's recent plunge means it's down almost 40 percent from its 52-week high, we believe that's created an opportunity for income investors with an aggressive streak. In addition to a current yield of 2.4 percent, the company has strong financials and global growth prospects.

The worries began when Coach's sales and earnings grew only 4 percent and 2 percent, respectively, for the second quarter of fiscal 2013, ended last December. Investors much preferred the nearly 20 percent annual growth Coach had delivered the past three years.

Worse, for the first time ever, the overall company failed to grow as fast as its handbag segment, which saw a 10 percent rise in sales. Coach's premium-priced handbags lost market share to competitors, especially Michael Kors Holdings (NYSE: KORS), which won market share by lowering prices.

Coach wisely has not lowered prices. If anything, Coach is expanding into higher-priced offerings ($400 and over), where it has a small presence but where consumers have gobbled up its limited offerings.

And Coach has a growth plan: It's leveraging its strong brand and highly efficient supply chain to launch new products and expand into Asia. This expansion, which has already started, is on track to show surprisingly good results starting sometime in 2013.

Last year, Coach got 71 percent of its revenue from products that didn't exist the year before, while maintaining industry-leading profit margins (recently at 35 percent). We think this bodes well for Coach being able to execute the following growth strategy.

More products for women. Coach handbags are a premium-priced brand that appeals to management-level women for its understated style, functionality and durability. North American sales are some 67 percent of Coach's business, and most of this is women's handbags, where Coach has about 30 percent market share.

Coach's sales have been weak in North America (down 2 percent in same-store sales for the latest quarter), due to a saturated, increasingly competitive market.

So Coach is now leveraging its strong brand recognition to expand into footwear, aiming to outfit its clients from head to toe (scarves, perfumes, sunglasses, cell phone carriers, etc.)

Already, accessories (non-handbag items) are close to 30 percent of sales. And they should continue to steadily gain ground. In March, Coach will begin selling a variety of shoes in about half of its 356 retail stores in North America. Since women tend to buy shoes more often than handbags, these new offerings should lead to higher sales volumes.

The men's business. Currently, the market for men's bags and accessories is growing 25 percent annually, and Coach holds a 17 percent share of this market. That's enabled its men's business to grow at a torrid pace: 50 percent growth is projected for fiscal 2013, ending in June, to more than $600 million in sales.

Growth in Asian markets. Coach now gets about a third of its revenue from Asia, where sales grew 12 percent in the latest quarter, and China posted a 40 percent gain. Coach has 117 stores in China and 193 in Japan, and in the past year bought 92 of its distributor locations throughout Asia, about half in South Korea and the rest in Singapore, Malaysia and Taiwan.

With only $22 million in debt, $800 million in cash, and a growing cash flow, Coach should be able to more than cover its dividend as well as its expansion.

Another reason Coach shares are worth bagging now: They're priced at 14 times trailing earnings vs. the industry P/E of about 20.

Source: Unexpected Value In Coach