Coach: Quality and durability

Investors should open their wallets for this high-end retailer.

By TheStockAdvisors Mar 21, 2013 1:36PM
Woman in mall with shopping bags copyright Paul Bradbury, OJO Images, Getty ImagesBy Ingrid Hendershot, Hendershot Investments

Coach (COH), founded in 1941, has grown from a family-run workshop in a Manhattan loft to a leading American marketer of fine accessories and gifts for women and men.

Coach products are renowned for their distinctive design, quality, function and durability. In 1985, Coach was acquired by Sara Lee and then spun off in 2000 at a split-adjusted price of $2.00 per share.

Coach reported sales of $1.5 billion for its second fiscal quarter, an increase of 4%, compared with the prior year period. North American direct sales rose 2% for the quarter with comparable store sales down 2%.

The North American holiday season proved challenging for Coach with a muted macroeconomic environment and Hurricane Sandy causing caution among consumers.

While competition intensified and promotional activity increased in the women’s handbag category, which grew about 10% during the quarter, Coach maintained its pricing strategies to protect its brand.

International sales increased 12% from last year to $411 million. China results continued very strong, with total sales growing 40% and comparable store sales rising at a double-digit rate.

The Men's business growth was also robust and is on track to generate $600 million of sales in fiscal 2013, up about 50%.

During the quarter, gross profit increased 4% to $1.1 billion and gross margin remained strong at 72.2%. Net income for the period totaled $353 million with earnings per share (EPS) of $1.23, increases over the prior year of 2% and 5%, respectively.

During the second quarter, Coach repurchased nearly four million shares at an average cost of $56.63 per share, spending a total of $225 million. Year-to-date, share buybacks total $400 million.

Coach has $1.4 billion remaining authorized for future share repurchases. As of Dec. 29, 2012, Coach held more than $858 million of cash in its handbag.

The company's highly profitable business model generated an outstanding 52% return on shareholders' equity during fiscal 2012. Coach's stock appears attractively valued trading for 13 times trailing earnings with the dividend yielding 2.5%.

We are opening our wallet and adding to our position in Coach, a high-quality company with a durable brand, a highly profitable business model and outstanding cash flows, which enable growing dividends and substantial share repurchases. Buy.

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