Should This Luxury Brand Be Coaching Your Portfolio?

By Ryan Guenette - September 6, 2012 | Tickers: COH, PSS, FRAN, GES, KORS | 0 Comments

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Coach Incorporated (NYSE: COH) is a marketer of fine accessories for both genders. Their vast portfolio of products includes bags, business cases, footwear, jewelry, sun wear, travel bags, watches, and fragrances, but is mostly famously known for its women’s pocketbooks. The company distributes its products through its Coach Retail stores, the electronic store on the Coach website, and about 1,000 United States department stores.  Over the past 5 years the company’s stock has rallied 25.33%, vastly outperforming the broader market which is down during this period. The company employs 15,000, and is valued at around $16 billion on the New York Stock Exchange. So should this luxury brand be coaching your portfolio?

Resilient & Robust Fundamentals

In 2002, Coach Incorporated reported earnings per share of $0.24. In 2012, the average analyst consensus believes the company will derive $3.53 per share from its business operations. This represents a 1,370.83% increase in earnings over the course of a decade. Based on these statistics, Coach‘s compound annual growth rate (CAGR) is 30.84%. In 2002, the company was relatively unknown and was still developing its brand. This caliber of growth is not going to be seen in the future, as Coach is an established brand, and has probably been discovered by nearly all of its potential customers. However, a more sustainable growth rate should be seen in the future as emerging markets, such as China, balance stagnant markets, such as Europe. Additionally, Coach possesses a dividend that is nothing more than a little icing on the cake. At the moment, Coach pays out an annual dividend of $1.20, which at the current price, puts the company’s dividend as yielding 2.12%. This is up from 2011’s annual dividend of $0.92, and is further expected to expand into the future. By 2015, the street anticipates the dividend to reach $1.42 annually, which at the current price would put the dividend as yielding 2.53%. From this we can see Coach’s financial strength, incredible growth over the past decade, and decently sized dividend.

The chart below displays Coach’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the foreseeable future.

Looking Forward

In times of economic downturn, people simply do not have the money or financial security to make purchases from Coach. Their products are extremely expensive, and are a major purchase. In times of economic downturn, Coach is focused on sustaining its business, while in times of economic prosperity, the company is rolling. If Coach is able to remain steady in times of downturn, it can prosper when the tides change.

Coach’s potential customers are likely to be citizens in the upper class, and as the chart below displays, the number of people in this class is rising, giving Coach more potential customer, and is injusted for inflation.

A final beneficial trait of Coach’s company is the huge vote of confidence from institutional investors. Institutional investors, such as pension plans, own 92.00% of the shares outstanding. These institutional investors are in it for the long-term, and strongly believe in the long-term story of the company.

Who Is Winning the Industry’s Fashion Show?

Compared to some of Coach’s most prominent competitors, such as: Guess? Incorporated (NYSE: GES), Francesca’s Holdings Corporation (NASDAQ: FRAN), Collective Brands Incorporated (NYSE: PSS), and Michael Kors Holding Limited (NYSE: KORS), Coach relates moderately in-line.

In terms of growth, Michael Kors tops the industry, while Collective Brands is the industry laggard. Coach and Guess are the only companies in the industry that pay out dividends, with Guess possessing the largest dividend, while Coach possesses the fastest growing dividend. In the fundamental ratio comparison, Michael Kors trades at a premium to its peers, while Guess is a bargain. The same is true when growth is taken into account. In the net profit margin comparison, Coach stands out to the upside, while Collective Brands stands out to the downside.

The Foolish Bottom Line

Coach’s main focus in times of downturn is to sustain its business, as customers are not willing to spent hundreds on one purchase. However, when the economy is firing on all cylinders, customers are drawn to Coach’s products like bees are to honey. The company’s possesses financial resolve, and an annualized double digit growth rate. The stock is also complemented by a moderate dividend, and is set to take advantage of a shift in social hierarchy. Additionally, the company’s long-term picture remains extremely solid, and is believed in by several institutions. The foolish bottom line is that Coach is great play for times of economic prosperity, but may turn ugly in downturns.     

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