Coach: The Legacy Continues

| About: Coach, Inc. (COH)

On October 23, 2012, Coach (NYSE:COH) announced solid Q1 results and the stock closed up over 7% (almost $4) to $58.15, on a day where the Dow was down 243 points (or 1.82%). Despite the recent chatter about Michael Kors (NYSE:KORS) eating into COH's growth potential, Coach proved that smart execution coupled with excellent products, innovation and a loyal customer base all equal a winning strategy.

What Coach announced yesterday:

  • North American sales increased 8% to $784MM
  • International sales increased 15% to $362MM
  • China's sales were up 40% (within International)
  • In Q1 '13, they retired over 3MM shares at an average cost of $56.59
  • They authorized a $1.5B stock repurchase through June 20, 2015

Lew Frankfort, Coach's CEO was quoted as saying:

We are well positioned for the holiday season and remain confident in our ability to deliver double-digit growth during our planning horizon given the strength of the Coach brand and our increasing global expansion. Further, the announcement today of the authorization of a new buyback program reflects this confidence in Coach's business outlook as well as our financial strength.

I have been a shareholder of Coach for 10 years and I read most of the press releases. Whenever Lew expresses a strong bullish statement prior to the holiday season, the stock performs very well and his track record is excellent. Although much uncertainty exists over the next few months, such as the U.S. presidential election, looming fiscal cliff, and global recession concerns, as long-term investors, we know that a bargain + patience = a winning investment.

At yesterday's close of $58.15, Coach's stock is trading just under where it was one year ago (closed at $59.56 on October 21, 2011). However, since then, sales and eps are projected to rise 12% and 9%, respectively over the prior year. This rise has contracted the p/e somewhat resulting in a more attractive price yesterday. Additionally, the stock repurchase will accelerate the eps as outstanding shares are retired as Treasury stock.

Coach appears to be attractively priced right now and for those whom wish to create a position, I recommend doing so before the holiday season is underway. For those concerned about volatility due to market conditions, selling PUTS may be a good strategy if you believe the stock may take a dip.

Since I currently have a long position on the stock, rather than purchase more shares at the current price, I sold PUTS to create current income and also allow for a subsequent purchase, but at a lesser price should the stock crater.

On September 25th, when Coach closed at $54.10, I sold November PUTS at a strike of $48 for $1.15. Since I enjoy a real bargain, I figured I couldn't lose. Either I am forced to buy more stock at a net cost of $46.85 ($48 stock price - $1.15 premium) - a 13% discount to the price that day, or the PUTS expire worthless and my yield (excluding brokerage fees) on the cash is 2.4% ($1.15/$48) in 53 days (Sept 25th - Nov 17th). Either way this appears to be a winning scenario for an investor who wishes to own Coach.

Disclosure: I am long COH. 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.