An affordable luxury stock

Coach is a well-known fashion brand, but the company lives and breathes production and infrastructure.

By Jim J. Jubak Nov 20, 2009 5:26PM

Jim JubakListening to the management team at Coach (COH) talk about the company's business is an odd experience.


This “fashion” company spends a lot of time talking about “engineering” its products and building production and distribution “infrastructure.” (Want to hear a sample of Coach-speak? Tune into the company's presentation at the Morgan Stanley Global Consumer and Retail Conference here).


And that's a major reason I like Coach shares in the current tough environment for luxury goods. 


Anybody can roll out a new product at a lower price point designed to appeal to value-conscious luxury-goods buyers (now there's a phrase I never thought I'd write), but it takes a company like Coach to introduce the new $300 Poppy handbag lines and “engineer” gross margins higher at a lower selling price. (For why you want some cost-cutting growth companies in your portfolio now, see this post).


Here's the story on the cost side: Thanks to increased sourcing from China, India, and elsewhere; stream-lined product design (the company took six months out of its normal schedule when it launched its new Waverly collection), and improved distribution (including a new Asian distribution center set to go operational in March 2010), Coach reported a gross margin of better than 72% in the first quarter of fiscal 2010. (The company's fiscal year begins in July, so the fiscal first quarter of 2010 ended in September.) 


And the company has told investors to expect gross margins to stay above 72% for the remainder of fiscal 2010. That's up from earlier guidance of 70% to 72%.


And here's the story on the growth side: Coach has stabilized sales in the US and Japan, which should let the stock price gradually reflect the company's huge sales opportunity in China. 


Coach projects that by 2013, China (including Hong Kong, Macao, and the mainland) will account for 20% of the global handbag and accessory market. That would be up from 8% today.


By 2013, that global market will have growth to $28 billion.


Some time during that period, China will surpass Japan to become the second largest handbag and accessory market in the world. Right now, Coach's sales in China are growing at a double-digit rate.  


The company will add 15 stores in fiscal 2010 to the 30 it has already opened in China. There's still a lot of opportunity in China: The company's research estimates that 72% of US consumers know the brand; in China, the figure is just 8%.


As of November 20th, I'm adding shares of Coach to Jubak's Picks with a target price of $40 a share by October 2010. It traded below $34 Friday.


Jim Jubak owns shares of Coach in his personal portfolio, and plans to buy more three days after this is posted.

2Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

124
124 rated 1
267
267 rated 2
467
467 rated 3
605
605 rated 4
645
645 rated 5
691
691 rated 6
617
617 rated 7
459
459 rated 8
313
313 rated 9
130
130 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
BIDUBAIDU Inc10
BXTHE BLACKSTONE GROUP L.P10
CELGCELGENE CORP10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.