You Don't Need A Coach To See This Value

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

It's interesting that many times I'm aware of a competitor to a company I own, and yet I don't take the time to research that competitor directly. Such is the case with Coach (NYSE: COH), as I used the company's information as a comparison to Fossil (NASDAQ: FOSL) in the past. I knew that both companies operated in the higher end fashion and accessories industry, but I never really did my own due diligence on Coach itself. While I still like Fossil's prospects, Coach is at least as good of a value and investors should not overlook this opportunity.

A consistent challenge for investors to understand is, the fact that retail is essentially divided into three main segments. Everyday retailers such as Wal-Mart, Target, and others, appeal to a broad demographic and their products and services are priced as such. What I refer to as middle-line retailers such as Macy's, Abercrombie & Fitch, and others, appeal to a broad base of customers yet their pricing power allows them better margins. The top-end of the spectrum is made up of companies like Coach, Tiffany (NYSE: TIF), Ralph Lauren (NYSE: RL), Vera Bradley (NASDAQ: VRA) and the previously mentioned Fossil. A misunderstanding occurs when investors assume that economic turmoil affects all level of retailers the same. Higher-end retailers like the ones we have mentioned are generally more insulated from economic challenges, and yet still benefit from better sales around the holiday season as mainstream customers treat themselves to these items they wouldn't purchase otherwise. In Coach's last earnings report, you can see that a high-end retailer can see significant growth even in the middle of the year, while others are just waiting for back to school and the holiday shopping season.

In the company's recent quarter, Coach's reported sales up 14.54% and diluted EPS up 20.89%. The company's sales came primarily from handbags, which represented 65% of overall revenue, accessories made up 28% of the total, and all other products made up the remainder. An impressive factor working in Coach's favor, is the company's diversity of product offerings. The company also sells watches under the Movado name, fragrances under Aramis, and even eyewear under the Luxottica brand. Results in North America were fairly impressive, in particular at their factory stores where sales increased 18.2%. However in a similar fashion (pardon the pun) to other retail companies, Coach is seeing its greatest sales growth overseas. While sales in Japan were a bit weaker than usual, revenue still increased 6.5%. In a truly impressive showing, Coach China showed a 45.5% increase in revenue and Coach Singapore and Taiwan grew revenue by 25.9%. With double-digit sales increases in part of the company's North American business, and significant growth overseas, you can see that Coach has strong momentum heading into the second half of the year. The question for investors is does Coach represent the best option for their investing dollars?

One way to compare retail companies is to look at their expected revenue growth in the next calendar year. Generally speaking, a company with strong revenue growth will usually have an easier time delivering strong earnings per-share growth as well. Coach is expected to see revenue growth of about 10.6% next year. By comparison, only Vera Bradley and Fossil are expected to grow faster at 14.5% and 12.6% respectively. Another way to compare these companies is by how frequently they beat earnings expectations. Using the same five companies again, Coach joins Fossil and Ralph Lauren as the three that have beaten estimates each of the last four quarters.

We can also look at each company's gross margin to determine which one has either pricing power or more cost efficiency versus its competition. By this measure, Coach stands alone with a gross margin of near 73%. Its closest competitor is Ralph Lauren, which reported a 62.26% gross margin in its most recent quarter.

Last but not least, let's take a look at each companies relative valuation to get an idea of what the market thinks of each company. Coach sells for just 14.6 times estimates which is the lowest P/E ratio of the group. The company's expected growth rate of nearly 14% places it only behind Vera Bradley and Fossil by this measure. As you can see, Coach performs well in comparison with its competition, yet the stock sells for the cheapest P/E ratio of the group. While this alone might be enough to make investors interested in buying the shares, the company's dividend and dividend growth is what really sets the company apart.

Over the last few years, Coach has been growing its dividend at a significant rate. In fact, of the several companies we looked at only Tiffany and Ralph Lauren pay a dividend at all. At current prices, Coach pays the highest yield. More impressive, in the last three years the company has increased its dividend by at least 30% each year. The fact that Coach currently has over $900 million in net cash and equivalents, is yet another argument that the company will continue this streak of significant dividend increases. Analysts are calling for revenue growth north of 10%, which makes it reasonable to expect earnings-per-share growth of 14% as well. Coach is also consistently beating earnings expectations as we've seen. Considering that the stock sells for a lower multiple than its competition, just like the company's handbags, this appears to be a high-class investment.

MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach, Fossil, and Tiffany & Co. Motley Fool newsletter services recommend Coach and Fossil. 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.

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