Coach's Strong Q2 Results Highlight Opportunities In China

| About: Coach, Inc. (COH)

In contrast to the profit warning from Tiffany (NYSE:TIF) a couple weeks ago, Coach (NYSE:COH), best known for its luxurious handbags, posted solid second-quarter results Wednesday and provided a very optimistic tone about its brand's potential in China. We'll be re-evaluating our long-term expectations for Coach, but we don't expect to make a material change to our fair value estimate at this time.

Coach's sales expanded 15% in the quarter, while earnings per diluted share advanced 18%, to $1.18 per share (versus consensus expectations of $1.15 per share). Direct-to-consumer sales increased 17%, as North American comparable store sales rose 8.8% (above our mid-single-digit estimate). The firm remains optimistic about its Men's business, which it expects to double during fiscal year 2012, but we're somewhat skeptical that Coach will achieve that goal. The handbag-maker noted that sales momentum remains robust in China, and management highlighted its tremendous opportunity in the region on the conference call:

…China is our largest geographic opportunity, given the size of the market and the rate of growth. During the quarter, our sales rose again sharply from prior year, fueled by distribution and significant double-digit same-store sales. Clearly, the Chinese consumer has embraced Coach, as evidenced by the excellent comps we're consistently generating and the extremely high repurchase intent among existing customers.

We were also quite impressed with Coach's ability to keep a tight lid on costs during the quarter, with margins advancing modestly, as lower overhead more than offset gross-margin pressures. All things considered, we remain on the sidelines with respect to Coach's shares (based solely on valuation) and look forward to reports from rivals Ralph Lauren (NYSE:RL) and Michael Kors (NYSE:KORS) that may provide additional insight into the health of the high-end consumer. However, we cannot rule out adding Coach to our Best Ideas portfolio at the right price.

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