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Shopping for Handbags: Why Its Time to Buy Coach

|Includes: RXI, Tapestry, Inc. (TPR), VCR, XLY

 For the buy and hold investor looking to capitalize on continued growth of China’s middle and upper classes and the recent uptick in domestic consumer spending, the number one maker of luxury handbags globally is your best bet.

Coach has been on a tear recently, rising approximately 82% from its 52 week low of 33.75 to its recent high of 61.44. Coach, like the broader S&P consumer discretionary index, has enjoyed a remarkable rally over the past year. Still, year to date Coach has performed in line with the broader sector returning 8.46% versus the index’s 8.42%.

Coach is currently trading at a somewhat expensive P/E ratio of 20.86 as of today’s closing price. Still, this is relatively inexpensive given Coach’s track record of strong growth and excellent management team. Over the past five years Coach has traded with a P/E anywhere from 25 all the way up to a high of 45 in 2007. This puts Coach’s current P/E of 21 on the lower side, suggesting that Coach may still have yet to run its course.

Growth prospects for Coach remain impressive. Despite difficulties posed for Coach’s Japanese operations by the recent earthquakes, Coach has continued to perform well. Coach’s most recent quarterly earnings release showed EPS rising 23% year over year from .50 to .62 per share.

Coach continues to experience rapid growth on all fronts. Despite a weak U.S. economy, comparable store sales grew by 10%, driven largely by growth in China. Coach has been opening stores in China at a rapid pace (18 in the past year alone), bringing the total to 55 with more slated to open in the coming year. Finally, Coach’s new men’s line has proved to be popular and Coach is looking to expand this line both overseas and within the U.S. in coming years. Coach opened 8 factory stores and one retail store in New York over the past year, all of which were received enthusiastically. Mike Tucci, president of Coach’s North American retail division commented that the men’s stores are “off to a great start” and that new stores will provide an important avenue for growth in coming years, particularly in China where men account for the majority of consumer discretionary spending. Finally, Coach is working with European department store Printemps to begin to penetrate the European market

Clearly, Coach is firing on all cylinders. New and growing sources of revenue from China, men’s stores, and Europe should continue to drive growth, along with increased consumer spending in the U.S. Assuming that Coach will have no trouble continuing to grow at the same double digit pace that it has for the past several years now, 61.44 should be a bargain price in years to come.

The probability of significant growth, a dividend of 1.5%, strong balance sheet, and a track record of success should make Coach an appealing stock for the buy and hold investor.