Coach 3Q07 Earnings Review

Coach (COH) reported earnings (see conference call transcript) of $0.39 versus consensus of $0.38. The following are the key takeaways from the press release.

COH reported sales of $625 million versus driven by strong comps in U.S. Retail (15.1%, Factory (26.6%). Operating margins were up an impressive +300bps, Year over Year. Gross margins were disappointing but were offset with some savings on the administrative side and they expect GM to regain traction in the upcoming quarters as the company introduces higher margin coated canvas handbags.

COH is exiting its Small Corporate Accounts business (to increase its brand control), which contributed 1c of income in the quarter and was expected to contribute 10c for 2007. COH trades at 15x EV/EBITDA and 27x calendar 2007 EPS, a premium to its peers but a discount to its historical P/E average of 28x. The multiple can be justified, with room to expand given high and consistent returns on capital, strong cash flow, near 25% sustainable earnings growth, and recent acceleration in the business.

Coach shares have been an impressive investment since the company’s IPO, and think the strong performance will continue.

COH 1-yr chart

COH 1-yr chart