As North America And China Drive Earnings Higher, I See Coach As A Viable Income Play

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

On Tuesday April 23rd Coach, Inc. (NYSE:COH) announced an increase of $0.15/share to bring its annual dividend to $1.35/share. It should be noted that this increase represents a 13% rise from its prior annual dividend of $1.20/share. In the wake of Coach's dividend increase I wanted to examine several of the catalysts behind my decision to establish a long-term position in this particular luxury retailer.

Overview: Based in New York, New York, Coach, Inc. engages in the "design, marketing, and distribution of handbags, accessories, footwear, jewelry, sun wear, travel bags, watches, and fragrances for women and men in the United States and internationally. The company offers women handbags, as well as business cases, computer bags, messenger-style bags, and totes for men". (Yahoo! Finance) Shares of COH, which currently possess a market cap of $14.20 billion, a P/E ratio of 13.94, a forward P/E ratio of 12.28 and a PEG ratio of 1.00, settled at $50.59/share by the end of Monday's trading session.

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Q3 EPS Performance: Also announced on Tuesday April 23rd were the company's Q3 EPS results of $0.84/share on revenue of $1.19 billion which was much better than street expectations of $0.81/share on $1.19 billion in revenues.

What were some of the catalysts driving the company's rise in net income? Let's take a look at both North America and China's contribution to the company's Q3 results.

North America

Performance: Total North American sales increased 7% to $792 million from $738 million last year. North American direct sales rose 8% for the quarter with comparable store sales up 1%. At POS, sales in North American department stores were slightly above prior year while shipments into this channel rose slightly as well.

Location Management: During Q3 the company opened one new retail store, two new Men's factory stores, and closed a total of five locations due to either lease expiration or underperformance.

Analysis: If the company's North American segment can continue to demonstrate strength as was the case during the third quarter, I think Coach could very well be on its way to having an ever stronger Q4 when the company reports during the latter part of July.


Performance: China results continued demonstrate significant strength, with total sales growing 40% and comparable store sales rising at a double-digit rate. Shipments into international wholesale accounts fell slightly, while underlying POS sales trends remained robust.

Location Management: In China, the 100th location on the Mainland was opened during the quarter, bringing the company's location total to 118.

Analysis: It was recently noted that the outlook for luxury spending in China looks promising, according to analysts. While the pace of luxury retail sales growth slipped in China from 2011 to 2012, the forecast for 2013 is for solid gains again. In the third quarter it's pretty clear that not only were the analysts correct in their forecast but China is and should continue to pay strong dividends for Coach, Inc.

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Recent Dividend Behavior: Since June 4, 2009, COH has increased its dividend a total of four times by an average of $0.065 per increase each time. The total increase equates to $0.2625/share or 350% over that period. From an income perspective, the company's forward yield of 2.67% coupled with its payout ratio (currently 31.00%) and its continued annual increases could equate into a very viable income option for long-term investors.

COH Dividend Chart
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COH Dividend data by YCharts

Chart Note: Although the above featured chart demonstrates Coach's superb dividend growth over the last four years, it does not include today's announcement which would clearly demonstrate the over increase of 350% since June 4th 2009.

Conclusion: When it comes to those who may be looking to establish a position in Coach, Inc., I'd continue keep a watchful eye on not only the company's dividend behavior over the next 12 months, but any key developments that may occur in both North America and China as both geographic regions have played a vital role in the company's outstanding Q3 performance.

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.