5 reasons Coach stock is looking good
This luxury company was a diamond in a rough Q3 earnings streak.
By Alyssa Oursler
Most companies that reported earnings on Tuesday had to be wishing they could trade places with Coach (COH).
A spree of subpar reports -- including not-so-hot news from United Parcel Service (UPS), Xerox (XRX) and DuPont (DD) -- handed Wall Street one of the worst days of the year, sending equities to their lowest levels since early September. Investors flocked to the luxury retailer, though, sending it skyward to the tune of more than 7% gains.
Coach posted earnings of 77 cents per share -- a 3% rise from the 73 cents it brought in last year and 2 cents better than analysts were expecting. Sales also saw a healthy 11% jump amid a quarter of revenue weakness.
Still, it wasn't enough to lift the laggard out of the red year-to-date. Plus, calls that luxury is dead have been echoing for months now, especially as big names like Tiffany (TIF) and Burberry Group (BURBY) also struggle.
So is Coach actually a good pick? Or were investors just grasping for any decent news in a bleak earnings landscape?
Well, the luxury company definitely has several trends going for it. Let's take a look at five:
Home is looking sweeter. Last quarter, COH slid 16%, thanks to one glaring soft spot in its report: dismal 1.7% growth in North American same-store sales. Already, that number is back on track, with 5.5% growth in Q1. Overall sales at home also moved up 8%. Plus, there are plenty of reasons to believe domestic shoppers are going to further open their wallets and let the cash flow in coming months. Among them: a five-year high for consumer sentiment, a study showing only 14% of consumers are changing their habits as the U.S. nears the fiscal cliff and another report that consumer spending is set to explode.
China is set for a soft landing. Even when Coach struggled in the U.S. last quarter, sales surged 60% in China. This quarter was no different. Comparable-store sales enjoyed double-digit growth, while overall sales posted a whopping 40% climb. Those are solid numbers considering the slowdown in China has been the No. 1 reason to be wary of luxury in general. The results are even better considering that China's slowdown just might be over. Proof of this came last week when its retail numbers were unexpectedly high and production numbers were also strong.
Growth is becoming a habit. Coach isn't making moves just in China. It recently introduced a Legacy line (the best debut in the company's history), it has been adding men's fashions and stores, it completed two acquisitions last quarter that give it a presence in Malaysia and Korea and it has been building e-commerce. Those aren't the only ways it's been growing. Coach's Q1 results make for the 13th straight quarter of sales growth and the 12th consecutive quarter of earnings growth -- a longer streak than most companies have on their resumes.
Costs are well managed. Of course, any growth comes at a cost. In fact, CEO Lew Frankfort actually dubbed this an "investment year," nodding to the fact that Coach's acquisitions and e-commerce efforts would reduce results. The good news is that Coach was able to handle those costs far better than analysts expected, according to Bloomberg. This didn't bode well just for the most recent quarter, but it's a good sign for future growth.
The bags are expensive, but the stock is cheap. The biggest appeal of the stock right now might actually be a result of its recent struggles. Coach's brand and business are built on high-price, high-fashion offerings -- pink leather handbags for $350, patterned sunglasses for $150 --but Coach's stock doesn't share the same lofty price tag. The company has lost nearly a quarter of its value since hitting $80 in March, putting it at a significant discount. COH is trading at around 13 times forward earnings, while Ralph Lauren (RL) sits just over 17, Michael Kors (KORS) at just under 30 and Fifth & Pacific (FNP) at nearly 45.
In the end, between some promising signs in the macroeconomy and continued growth from the company itself, the largest handbag maker in the U.S. seems to have a lot going for it -- and investors have taken note.
Chances are, though, that the stock's marked-down price tag is what really caught their eye. After all, who doesn’t love bargain hunting for high-end goods?
As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.
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