This Profitable Luxury Retailer Is Still Cheap
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Coach (NYSE: COH) has had quite a sluggish share-price performance since the beginning of the year, moving up by only 3.6%, much lower than the S&P 500’s return of 13.8%. Still, it is in the portfolios of many famous investors including Joel Greenblatt, Chuck Royce and Paul Tudor Jones. Let’s take a closer look at this luxury retailer to determine whether or not Coach is a good buy at its current trading price.
Coach experienced the highest growth in China
In the third quarter 2013, Coach experienced decent growth in both its top line and bottom line. Revenue increased from $1.18 billion in the first quarter last year to $1.19 billion this year, while the net income rose 6.2%, from $225 million to $238.9 million. Moreover, its EPS grew at a higher rate, at 9%, from $0.77 per share to $0.84 per share, thanks to the reduction in the number of total outstanding shares compared to the same period last year.
Coach seems to have a lot of growth in the most populated country in the world, China. Its total sales in China increased by as much as 40%, with double-digit growth in comparable-store sales. Coach expected to generate around $425 million in revenue in China within this year. According to Red Luxury, Coach's success in China was due to three main reasons. First, Coach positioned itself in the "accessible luxury market," with its price 50%-75% lower than the top luxury brands. Thus, it could weather the economic downturn. Second, as a third of the luxury market in China was for men, Coach has grabbed the opportunity to execute the model of dual-gender sales, opening more men's stores in China. Last but not least, the retailer has multi-channel distribution strategy. It not only sells its products through its retail stores, but also through factory outlets and department stores.
Michael Kors posts 150% growth in EPS
Michael Kors (NYSE: KORS), Coach’s main competitor, grew significantly in the fourth quarter. Its sales increased by 59.1% to $577.4 million, from $362.9 million in the fourth quarter last year. Net income more than doubled, from $43.6 million, or $0.22 per share to more than $100 million, or $0.50 per share. For the full fiscal year 2013, its total revenue jumped 67.8% to $2.18 billion while its EPS experienced a year-over-year growth of more than 150%, from $0.78 to $1.79.
What makes me interested in Michael Kors is its capability to grow in Europe. In the past three years, its retail net sales in Europe came in at $101.7 million with the comparable-store sales growth of 51.3%. In North America and Japan, Michael Kors also had double-digit comparable-store sales growth, of 39.6% and 14.7%, respectively. Indeed, Michael Kors has been doing quite well with its operation in Europe, with its marketing spending to build the brand, raising shoppers' awareness. In the next few years, Michael Kors wanted to produce around $500 million in sales in more than 100 stores in Europe.
Both Coach and Michael Kors have managed to deliver a significantly high return on invested capital. In the past 12 months, Michael Kors generated as high as 52.11% in return on invested capital. Coach’s ROIC was a bit lower, at 50.34%. Their peer, Tiffany & Co (NYSE: TIF), the premium jeweler, was the least profitable, delivering only 12.23% in its return on invested capital. Both Coach and Michael Kors' ROIC are much higher than the average single-digit return of the retail industry, at around 8%-9%.
Coach is still the cheapest luxury retailer
In the retail industry, we should take a close look at how quickly the company turns its receivables and inventory into cash, measured by cash conversion cycle. The lower the ratio, the more quickly the operation can generate cash, which is what investors want to see in a company. Michael Kors seems to have the most efficient operation with the lowest CCC at only 92 days. Coach’s CCC is higher at nearly 113 days while Tiffany’s CCC is extremely high, at nearly 473 days.
When it comes to jewelry, consumers think of Tiffany. According to recent Digital Luxury Group research, Tiffany has ranked at the top in the most searched-for jewelry brands. Its collection, "Return on Tiffany" is also the most searched-for jewelry collections in the U.S. In the first quarter 2013, Tiffany experienced high comparable-store sales growth of 8% worldwide. It also had sales growth in all geographical regions including the Americas (6%), Asia-Pacific (15%), Japan (2%) and Europe (6%). The company estimated to generate around $3.43 to $3.53 per diluted share in the full year 2013, with the worldwide revenue growth at a mid-single-digit percentage in U.S. dollars.
What I like about Coach is its lowest valuation among the three companies. At $57.50 per share, Coach is worth around $16.1 billion. The market values Coach at only 9 times EV/EBITDA.
EV/EBITDA represents enterprise value/earnings before interest, taxes, depreciation and amortization. It is an important concept of business valuation as it takes into account the relationship between the market value, the debt level, cash position and the cash flow of a business. The lower the ratio, the cheaper the stock.
Tiffany is trading around $77.90 per share, with the total market cap of $9.95 billion. At 11.84 times EV/EBITDA, it has a higher valuation than Coach. Among the three, Michael Kors is the most expensively valued. At $61.90 per share, it was worth around $12.4 billion on the market. The market values Michael Kors at 17.73 times EV/EBITDA.
My Foolish take
Michael Kors seems to grow quite fast with great operating performance and high profitability. However, it is valued at a premium. Among the three companies, I like Coach the most with its lowest valuation and similar high return on invested capital compared to Michael Kors. Moreover, the fast-growing Chinese market could benefit Coach in the long run.
Michael Kors is one of today's hottest high-end fashion brands, and that's translated into one of the best-performing stocks in retail -- since its debut on the market in late 2011, the share price has more than doubled. But with all that growth, has the stock finally become too expensive, or is there still room left to run? The Motley Fool's premium report on Michael Kors gives investors all the information they need to make the right decision. We cover the key must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.
Anh HOANG owns shares of Coach. The Motley Fool recommends Coach. The Motley Fool owns shares of 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!