A Post-Holiday Bargain

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The post-holiday season is a great time to go shopping for bargains, especially this year in which reportedly weak holiday sales have generated some very exciting buying opportunities in the retail sector. Shares of Coach (NYSE: COH), for example, fell by more than 6% on Wednesday in reaction to economic reports, but this seems completely unjustified based on the company's fundamentals and growth opportunities.

Bargain shoppers have some good reasons to grab Coach shares at current levels.

A High Quality Business

Coach is well known for its high end handbags and accessories, and the company has been expanding into different products by broadening its shoe offerings and developing a new line of products for men. The company operates in the “affordable luxury” segment of the market, which means high end products that are still accessible for most people.

An average Coach handbag sells for something around $325, which is still aspirational but much more affordable than $2,000 for a Louis Vuitton handbag and more than $1,000 for other handbags, like Gucci and Prada. Coach is expensive, but not prohibitive.

Besides, the company is smart when it comes to providing options for different price levels. Coach has several lines of handbags with various price ranges, and it has also been launching smaller, mode affordable products in times of economic headwinds. This strategy has delivered excellent returns when it comes to growth and profitability.

High end retail usually generates above average profit margins, since companies with strong pricing power can translate those higher prices into bigger returns for investors. As if if that weren't enough, the company has an efficient management team which extracts top notch profitability from its operations, even more than other high end retailers.

The table below compares profitability figures for Coach and other high end players like Ralph Lauren (NYSE: RL), Michael Kors (NYSE: KORS), Tiffany (NYSE: TIF) and Saks (NYSE: SKS). The conclusions are quite clear: Coach beats each of these competitors in the three profitability measures analyzed: return on equity, gross margins and operating margins.

This certainly speaks well about the company's brand value and management capabilities, and it also reduces the risks in a recessionary environment. If Coach needs to reduce prices to continue competing effectively in a harsh economy, it has plenty of space to do it while still generating attractive returns for investors.

Positioned for Growth

The company has some interesting growth opportunities ahead, and Asian markets look like a very promising geography for Coach, especially China, where the company's brand and designs are much appreciated by consumers and management is planning to repeat the success it's had in Japan.

Coach plans to increase sales in China to $500 million in 2014 from the $300 million expected in 2012, this doesn't sound excessively optimistic considering that Coach reported a 40% increase in China sales for the last quarter, backed up by double digit same store sales.

Coach is also expanding its line of products by launching men's accessories; this new segment has received a positive initial reception from customers, and it has a lot of room to grow over the following years as it still represents a marginal percentage of the company's overall revenues.

Attractive Valuation

In spite of being a more profitable business, shares of Coach are trading at cheaper valuations than other luxury retailers; the company carries a lower P/E, forward P/E and P/E to growth (PEG) ratio than any of its competitors in the table.

From a historical perspective, the stock looks quite cheap too: The current P/E of 15.3 has not been observed since the times of the great Recession of 2008-2009, a clear demonstration of the degree of negativity currently incorporated in the company's valuation.

Bottom Line

Coach is a great company with fantastic profitability and plenty of growth prospects. The stock is clearly undervalued, so you don't need to be a genius to understand that this is a very convenient deal for opportunistic investors willing to go bargain shopping after the holidays.

 


acardenal owns shares of Coach. The Motley Fool owns shares of Coach and 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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