Buying Opportunity in This Luxury Stock
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Coach (NYSE: COH) were falling by an eye popping 16% on Tuesday after the company disappointed investors in its earnings report. Although the company may be facing some headwinds in the middle term, Coach is an exceptionally good business, and investors should consider the possibility of capitalizing the current weakness to position them self in this high quality stock at convenient entry prices.
The company has more than 500 stores in the US, less than 200 in Japan and is in its way to 100 China stores in the short term, both Japan and China have a lot of potential for more stores as the products enjoy strong acceptance there. Based on the success it is having in those countries, Coach is expanding into other Asian destinations like Malaysia and Korea.
Besides, Coach has made a smart move by launching its men´s accessories line of products, which capitalizes on the company´s brand name and store presence in order to promote growth via new product alternatives.
This marketer of luxury handbags and accessories has sustained extraordinary levels of profitability and growth through the years, and there is no reason to believe the company is losing any of its fundamental attributes. Coach reported a 12% increase in sales and 27% more in diluted earnings per share, figures which would make most other companies in the industry tremble with envy.
But investors felt concerned about slowing sales in North America, although the numbers in Asia where better than expected. Also, the company´s management was quite conservative in their assessment of the middle term scenario, North America is expected to remain weak and, Coach will continue investing heavily to expand in Asia, which could put some pressure on profitability.
From the press release:
"As we look forward to FY13, we are mindful of balancing the impact of the muted consumer environment in North America and a softening global macroeconomic outlook with our optimism around the launch of Legacy, Men's and the strong international expansion opportunities for Coach. Additionally, FY13 will be an investment year, as we amplify our actions to drive long-term growth. Most significant is our acceleration of the acquisition of the domestic retail operations of key Asian distributors - including those in Malaysia and Korea in the first quarter - and the further development of the infrastructure to support our global growth. In addition, we're distorting investments in the digital space to strengthen our capabilities and deepen our engagement with consumers. We expect that together these investments will result in modest deleverage in FY13."
"Our goals remain unchanged. We're committed to achieving double-digit top- and bottom-line growth over our planning horizon. We have a business model that generates significant cash flow and we're in a position to invest in our brand while continuing to return capital to shareholders," Mr. Frankfort concluded.
There may be some negative factors affecting Coach over the next quarters, but as long as the company remains on its long term path, transitory weakness should be considered a buying opportunity.
In the following table we compare Coach versus other high en clothing and accessories companies: Ralph Lauren (NYSE: RL), Michael Kors (NYSE: KORS), Tiffany (NYSE: TIF) and Saks (NYSE: SKS).
Coach is clearly the most profitable company in the table; it exceeds its peers in the four profitability measures analyzed: Return on Assets, Return on Equity, Gross Margins and Operating Margins. When it comes to earnings per share growth, Coach is above Ralph Lauren, Tiffany and Sacs with an almost 20% annual increase in earnings per share for the last five years.
Only Michael Kors managed to grow much faster than Coach, but its shares are also much more expensive at a P/E of 60. Coach, on the other hand, is trading at a similar valuation to those of Ralph Lauren, Tiffany and Saks, having better profitability and growth track record than them.
Lackluster demand in North America, coupled with higher costs in Asia, could weight on Coach over the following quarters. But none of that changes the fact that this is an extraordinary company with a proven track record of growth and profitability, this looks like a nice opportunity to buy a luxury stock and discounted prices.
acardenal owns shares of Coach. The Motley Fool owns shares of Tiffany & Co. Motley Fool newsletter services recommend Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
