Coach - China And Men's Business Give Allure To This Luxury Stock

| About: Coach, Inc. (COH)

Shares of Coach (NYSE:COH) rose up to 12% in Tuesday's trading session. The marketer of accessories and gifts for men and women announced its third-quarter results before the market open. Investors applaud the strong results and the dividend hike.

Third-Quarter Results

Coach generated third-quarter revenues of $1.19 billion for its fiscal 2013, up 7.0% on the year before. The company notes that sales rose by 10% in constant currencies, as the U.S. dollar advanced against many major international currencies. Revenues for the quarter came in line with consensus estimates.

The company successfully expanded its gross margins by some 35 basis points to an incredible 74.1%. Yet expenses have been increasing rapidly as well on the back of the acquisition of retail businesses in Asia. Selling, general and administrative expenses as percentage of total revenues rose 150 basis points to 44.8%. Consequently, operating profits rose merely 3.3% to $348.5 million.

Thanks to lower effective tax rates, Coach managed to increase its net income by 6.2% to $238.9 million. As a result of its share repurchase program, earnings per diluted share rose by 9.1% to $0.84, beating consensus estimates by three pennies.

CEO and Chairman Lew Frankfort commented on the strong earnings reports, "We're pleased with the solid results we achieved in the third quarter as well as the progress we're marking towards our transformation to a global lifestyle brand, anchored in accessories. Our results demonstrate the brand's strength across channels, categories and geographies, and reflect the traction we're achieving in Men's and digital, two key initiatives."

A More Detailed Look

Coach still derives roughly two-thirds of its revenues from the North American business. Sales rose 7% to $792 million as direct sales were up 8%, while comparable-store sales increased by a percent.

The international activities reported a 6% increase in revenues. Strong results were masked by unfavorable currency movements as revenues were up 14% in constant currencies. Results were driven by a 40% increase in Chinese revenues. Driven by the strong performance in China, Coach now expects to generate annual revenues of $425 million in the country.

The company's Men's business is furthermore on track to double annual revenues to more than $600 million.


Coach ended its third quarter with $928.5 million in cash, equivalents and short-term investments. The company operates with merely $22.6 million in short- and long-term debt, for a net cash position, which is approaching the $1 billion mark.

Sales for the first nine months of the year rose 7% to $3.85 billion. Net income was up 3% to $813 million, coming in at $2.84 per share. At this rate the company is on track to generate annual revenues of $5.0 billion, on which the company could earn a little over $1.0 billion.

Factoring in a 10% jump during Tuesday's trading session, the market values Coach at $15.6 billion. This values the operating assets of the firm around $14.6 billion. As such operating assets are valued around 2.9 times annual revenues and 13-14 times annual earnings.

Coach hiked its quarterly dividend by 13% to $0.3375 per share, for an annual dividend yield of roughly 2.4%.

Some Historical Perspective

Shares of Coach have seen great returns over the past decade as they rose from a level around $10 in 2003 to highs of $50 in 2007. Shares fell back to lows of $10 in 2009 but recovered to all-time highs around $77 at the start of 2012.

From that point in time shares have lost roughly a quarter of their value, currently exchanging hands at $55 per share.

Between 2009 and its fiscal 2013, Coach managed to increase its annual revenues by little over 50% to an estimated $5 billion. Net income rose by a similar percentage to little over $1 billion estimated for this year. Earnings per share rose a bit quicker as the company retired a little over 10% of its shares outstanding over the past five years.

Investment Thesis

Despite the sizable jump in Tuesday's trading session, shares are trading roughly flat year to date. At the presentation of its second-quarter earnings in January, shares fell from $60 to $50 per share. Tuesday's bounce back sends shares to levels around $55 per share.

The firm's strong balance sheet and improving cash flows are allowing the company to announce a 13% dividend hike, providing investors with a decent dividend yield of 2.4%. Shareholders have seen even greater cash flows in recent years as the company repurchased its own shares at rates of up to 5% per annum.

Investors are also pleased with the two growth stories of Coach being China and its Men's business, both growing very rapidly thereby boosting the allure of the stock. Combined both high growth activities, which make up one-fifth of total revenues, masks the slow growth in core operations. A slight disappointment for the company is the resignation of Reed Krakoff, the Creative Director of the company who will focus on his namesake brand.

Overall investors are pleased as China and the Men's business continue to perform well. At the same time the valuation at 13-14 times annual earnings is more than fair, especially as the company has a rock-solid balance sheet, allowing Coach to hand out presents to shareholders in terms of share repurchases and dividend hikes.

Given the 25% correction of the past year and the solid performance over the past quarter, current levels might represent excellent value for the medium to long term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.