Open Your Wallet For Coach: Durable Brand, Highly Profitable Operations, Outstanding Cash Flows

| About: Coach, Inc. (COH)

Coach (NYSE:COH) is a leading American marketer of fine accessories and gifts for women and men, including handbags, men's bags, women's and men's small leathergoods, weekend and travel accessories, footwear, watches, outerwear, scarves, sunwear, fragrance, jewelry and related accessories. Coach is sold worldwide through Coach stores, select department and specialty stores, and through Coach's website.

Coach, founded in 1941, has grown from a family-run workshop in a Manhattan loft to a leading American marketer of fine accessories and gifts for women and men. Coach products are renowned for their distinctive design, quality, function and durability. In 1985, Coach was acquired by Sara Lee and then spun off in 2000 as a publicly-traded company at a split-adjusted price of $2.00 per share.

In fiscal 2012, Coach's net sales rose 15% to $4.8 billion while net income increased 18% to $1.0 billion and EPS rose 21% to $3.53. Strong double-digit sales and EPS growth was driven by aggressive growth in international markets, with 64% sales growth in China to $300 million, thanks to double-digit comparable store sales growth.

Coach also maintained market leadership in the rapidly-growing men's accessories category as sales doubled to more than $400 million during the year. The men's business is expected to contribute 25% of Coach's sales growth in the next few years.

Free cash flow increased 17% during the year to $1 billion. As of year end, Coach's debt-free balance sheet was stuffed with $917 million of cash, a 30% increase over the prior year. During the year, Coach significantly increased its dividend and spent $700 million to repurchase 10.7 million shares at an average cost of $65.49 per share. Capital expenditures in fiscal 2013 are expected to increase more than 35% to $250 million as the company expands its store base. Square footage in fiscal 2013 is expected to increase 12% through at least 30 new stores in North America and 30 new locations in China with China's sales expected to increase by more than 30% to $400 million.

The company's highly profitable business model generated an outstanding 52% return on shareholders' equity during fiscal 2012. Fiscal 2013 sales should increase at a double-digit rate with gross margins remaining strong in the 73% range. Fiscal 2013 will be an investment year which is expected to contribute to modest compression in operating margins. While there may be some short-term earnings pressure, management remains confident in their long-term objectives of double-digit sales and earnings growth. Long-term investors should open their wallet for Coach, a HI-quality company with a durable brand and a highly profitable business model which generates outstanding cash flows and growing dividends. Buy.

Disclosure: I am long COH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.