Generally, one of my investing rules is to purchases shares in companies that create or sell "needs," not "wants" - e.g. oil via ExxonMobil (NYSE:XOM), toilet paper via Kimberly Clark (NYSE:KMB) - rather than handbags and personal accessories like Coach (NYSE:COH). However, there are always exceptions to the rule. When one can acquire greatness at a bargain sale price, like the 18.57% drop in Coach on July 31, 2012, the bag that rarely goes on sale was at clearance pricing!
Coach has been a consistent growth story for more than a decade - growing topline globally all while expanding margins with mix (pricing) and materials (fabrics rather than all leather). Their price category expansion for younger and also higher-end consumers has been stellar as they know their customers very well. To top it off, they also have an excellent management team lead by Lew and a dividend, which is healthy at 2.4% currently.
So what happened to cause the large stock decline? Coach announced double digit top and bottom line growth as they typically do - both in their quarterly and annual results. Consensus revenue and eps growth for both fiscal years 2013 & 2014 are predicted at mid-to-upper teens. Lew mentioned they accomplished all of their major goals in the past year - expansion internationally, becoming a market leader in the men's accessories category, and harnessing digital growth opportunities.
He also disclosed a slowdown at factory stores and a need to discount through coupons, a rarity for Coach. Investors got spooked. Is this a market over-reaction or is there more to the story? One observation I have on Lew's comment about factory store slow down is possible cannibalization from Coach's recently (spring 2012) launched eBay Factory Store, which has done very well. Coach found that at any one time there were over 100,000 of their products on eBay for sale. These products were being purchased by their loyal customers who were flipping a quick profit on eBay. Coach got wise to this and launched periodic Flash Sales, where they enjoy direct selling. One can decipher that this action reduces Factory Store sales, but also raises margins and direct control of their brand on eBay (well done). So, although a short-term revenue hit, this is part of longer-term strategic initiatives to grow digital sales and continue margin expansion.
The large price drop in the stock has pushed the stock down to levels not seen since October 2011. The current price at around $50 (forward p/e 12 and current p/e of 14) provides an excellent entry point for the long-term and patient investor. Coach has performed very well running a marathon over the past decade. But, they are now in a triathlon and I'm willing to bet they'll win this race.
Disclosure: I am long COH.