Is Coach a Good Investment?
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As Warren Buffett will tell you, hunting for elephants is not easy. Coach (NYSE: COH) has had grown over the past decade with their trademark handbags. Their $13 billion market cap means it needs to make major strategic investments to maintain its growth. Coach is not perfect by any means, but investors should not ignore its high margins and high return on investment.
GES Return on Invested Capital data by YCharts
Coach's latest 10-Q shows some interesting trends. North American comparable same store sales decreased while Chinese same store sales grew significantly. In order to eke out some growth in North America, management had to open up 15 new factory stores. The decrease in same store sales helped to spook investors and put downward pressure on the stock.
Coach is not as nimble and hip as it once was, but it is still a very profitable machine. Its profit margin of 21.3% is strong and its return on invested capital is very high. Even though future growth in its traditional North American market is questionable, Coach is well positioned to benefit from Asia's growing middle class. The company already has 186 stores in Japan, 117 in China, 48 in Korea, 27 in Taiwan, 10 in Malaysia, and seven in Singapore.
This company is not perfect, but it is trading at a low valuation under 14 times yearly earnings and very profitable.
Where are Other Companies at?
Europe is an important part of Guess? (NYSE: GES) and the fashion company is looking to expand their number of European stores significantly to 850. The European debt crisis has recently made its way into more developed nations like France and investors should take note. If the underlying difference between the level of economic and political integration is not dealt with, then the core nations will start to suffer and Guess will take a serious hit.
Guess' North American comparable same store stares were down significantly with decrease of 6% in the last quarter. Asia posted the biggest revenue gain, although Guess' overall return on investment of 18.2% is nowhere near Coach's 50.4%. Guess and Coach are trading at similar valuations, but given Coach's superior return on investment Coach is the better investment.
Limited Brands (NYSE: LTD) main brands are Victoria's Secret and Bath and Body Works. Overall the company's comparable same store sales have increased for the past three years. The company is looking for more growth by increasing the size of their Victoria Secret stores.
The company's revenue growth is almost flat over the past five years but their five year EPS growth rate is 15.08%. The closing of a number of under preforming stores has clearly paid off. Limited Brand's return on investment of 17.7% and profit margin of 6.9% are not horrible, but Coach has made more profitable investments and offers strong geographical diversification.
Conclusion
Coach has a very well-known brand and is well positioned to take advantage of Asian growth. The company is not perfect and will need to keep an eye on smaller, more nibble players. Even with these challenges, Coach is a very profitable company and has the resources to maintain and grow its operation.
MrCanadian1 has no position in any stocks mentioned. The Motley Fool recommends Coach and Guess?. The Motley Fool owns shares of Coach and Guess?. 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!
