Pick up Coach stock on markdown
The luxury retailer has become the opposite of what it sells: a bargain.
By Alyssa Oursler
This Tuesday was a tough one for luxury retailer Coach (COH). The stock ended nearly 8% in the red -- its largest one-day drop since the first month of the year -- thanks to some not-so-hot fourth-quarter earnings.
Savvy investors, though, should see the glass as half-full, as Coach stock's tumble is a prime opportunity for a targeted income buy.
First, though, a quick recap of the bad:
1. Coach's fourth-quarter earnings tumbled an ugly 12% (USAToday), thanks in part to a 1.7% year-over-year drop in North American same-store sales -- the second decline in the past three quarters.
2. Revenue increased by nearly 6%, but still fell short of Wall Street's expectations.
3. This sparked concern that Coach is losing market share quickly in the crowded luxury space, thanks to rivals like Michael Kors (KORS), Ralph Lauren (RL), Fifth & Pacific (FNP), Tory Burch and more.
4. More management is headed for the door. CEO Lew Frankfort already announced his soon-to-come resignation earlier this year. Now, we've learned that North American Group President Mike Tucci and Coach President and COO Jerry Stritzke will leave next month, and many are speculating (buzzfeed) that Stritzke will upgrade to become CEO of Lululemon (LULU). Executive creative director Reed Krakoff also was planning to depart . . . and now is taking his brand with him (style.time).
To sum things up, it's easy to see why investors essentially sprinted for the door. Once again, though, there's plenty of reason for them to come jogging back today.
The main one -- for me, at least -- is Coach's now more attractive dividend. It's tough to find yield in retail stocks (InvestorPlace), with companies like American Eagle (AEO) and Kohl's (KSS) representing the higher end of the specialty retail-income space at yields around 2.5%. But with Tuesday's haircut, COH's yield improved by nearly 20 basis points to hit 2.6% as of this writing, slightly better than the 10-year T-note.
Of course, Coach stock is not just a decent income play, but a company that has improved revenue for more than 15 straight quarters, boasts a legacy brand that will always maintain a loyal core following, and is expanding internationally and into menswear.
Plus, it's a bargain.
Many other established names in the luxury space -- the ones supposedly eating Coach's lunch -- are as overpriced as the handbags they shell out. Fifth & Pacific, for one, sells at an eye-popping 61 times next year's earnings despite expectations of just 10% annual EPS growth for the next five years. Ralph Lauren's forward P/E of 18 isn't as galling, but comes on the same growth prospects.
Coach, on the other hand -- despite cries about unpopular handbags -- is still expected to one-up those rivals with more than 11% annual growth over the next half-decade . . . and at a cost of just 11 times earnings. Meanwhile, COH is trading only 15% off its 52-week low, all while analysts' median price target represents an upside of almost 20%.
From a fashion perspective, you have plenty of other choices in the luxury sector that make Coach seem boring and outdated. But thanks to yesterday's sea of red in Coach stock, you can now snag an established high-end business with consistent revenue growth, decent growth prospects and a solid dividend -- all for a reasonable price.
The bottom line is that, right now, Coach is the opposite of what it sells: a bargain.
For investors, that should never go out of style.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.
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