Coach Returns To Growth After A Weak Fourth Quarter

| About: Coach, Inc. (COH)

Aspirational luxury brand Coach (NYSE:COH) reported strong earnings for its fiscal year 2013 first quarter Tuesday morning. Revenue and earnings were roughly in-line with expectations, with revenue growing 11% year-over-year to $1.16 billion and earnings expanding 5% year-over-year to $0.78 per share. The company also announced a $1.5 billion share buyback program.

After a rough fourth quarter, North American same-store sales rebounded, growing 5.5% year-over-year, driving total sales up 8% to $784 million. This compares to the firm's anemic 1.7% same-store sales growth during its previous quarter. Department store sales in North America were flat, though the stores ordered fewer inventories than a year ago. Coach's Legacy collection, which CEO Lew Frankfort highlighted in the press release, appears to be resonating with consumers who are flocking to bold colors and simple designs.

Gross margins were flat year-over-year at 72.8%, suggesting the firm has maintained solid pricing and not moved to discounting. SG&A ticked up 210 basis points to 44.2%, mainly resulting from the firm's acquisition of its Korean and Malaysian businesses.

China also rebounded nicely, with sales in the country growing 40% year-over-year and same-store sales expanding at a double-digit pace. Overall, international sales grew 15% year-over-year to $362 million, even as sales growth in Japan remained constrained. Though we contend that Michael Kors (NYSE:KORS) is the more popular brand with greater growth potential, we think Coach has a strong opportunity to grow in emerging markets and China. Coach's aspirational luxury glimmer may be fading in the US, but the company continues to lack much of a presence in Europe, and its lower price points should resonate with growing middle-class consumers throughout the world.

On a broader level, the firm's strength in North America speaks to the resilience of the US consumer, and why we've yet to turn bearish on the domestic economy. While capital investment remains weak, strength in housing and the auto sector has shown that consumer spending has yet to wane. Fears of Spanish debt auctions and Chinese industrial production have little to do with marginal consumption decisions from average US consumers, in our view, so we think companies with modest European exposure will continue to report good results.

Still, shares of Coach look fairly valued, so we aren't interested in adding the company to our Best Ideas portfolio (click here for more information), though the holiday season could be strong.

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