Is Coach still America's premier luxury brand?

Even amid restrained consumer spending, the retailer has shown revenue growth as it expands product lines.

By Benzinga Jan 24, 2012 7:14PM

Image: Credit card (© Burke/Triolo Productions/BrandX/Getty Images)By Jay Wong, Benzinga Staff Writer


Coach (COH) announced a positive earnings report Tuesday, with second-quarter profit of $1.18 a share beating analyst estimates of $1.15. The company also reported sales of $1.45 billion, surpassing estimates of $1.43 billion.


The company has shown strong revenue growth since emerging from the recession, as it has expanded product lines with more affordable accessories and a larger men's collection. In its earnings call, the company stated that the men's business is on track to double sales this year.


Despite restrained consumer spending over the past year, Coach has retained its title as an affordable luxury brand that many women aspire to have. The company relies heavily on its outlet stores to move merchandise, a strategy that benefits from customers' ongoing love for outlet malls. The company has also moved more production to China to cut costs and boost margins.


A concern for Coach is its reliance on the Asian markets to drive a great deal of its sales. Many analysts have expressed worries that that fading customer demand in China's slowing economy could slow revenue growth for Coach. "The risk is a China blowup," said Morningstar analyst Paul Swinand in an interview with Reuters. "People were assuming luxury is a safe haven and are now rotating out."


The company has also experienced some technical problems. Its website was hacked Tuesday morning and was redirecting some visitors to an unauthorized site. In multiple calls with Benzinga analyst Abhi Rao, Coach representatives showed a lack of coordination on the issue. A customer service representative did not have knowledge of the issue, while a Coach headquarters' spokeswoman stated that the company did know about the problem and was working to remedy the issue.


Despite minor concerns, Coach appears poised to continue growth, as its products are still desired by women across all income levels. An expansion of its product offerings that will appeal to more middle class women, as well as more men's offerings, will help boost revenue growth in the short term. The company's trademark "C" logo bags are still a symbol of American luxury, and will remain in the hearts of women for years to come.


ACTION ITEMS:

Bullish:
If you believe Coach will continue to generate strong revenue growth, consider these trades:
  • Go long Coach. Shares have appreciated considerably since their 2008 lows and will continue to grow as long as the company can find new markets for its products.
  • Go long other American luxury brands such as Tiffany & Co (TIF) or Ralph Lauren (RL). If consumers discover their appetite for American luxury goods again, these brands could benefit.
Bearish:
If you believe that customers will continue to show restrained spending, consider these trades: 
  • Go short Coach. Shares could pull back after their recent gains, and analysts concerns over the buying power of Chinese consumers could weigh on the minds of Coach investors.
  • Go short a retail ETF. If Coach struggles to generate significant revenue growth this year, the lack of demand could affect all retailers.
Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security.

More from Benzinga:
9Comments
Jan 25, 2012 10:15AM
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Coach is fabulous! No surprise their sales beat earnings - I buy their stuff for tons of female friends and they're always excited.
Jan 25, 2012 10:08AM
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I never thought it was America's Premium Luxury Brand. 
Just another designer brand that sells crap across multiple markets to create an illusion. 
Jan 25, 2012 9:15AM
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I have a coach belt and it broke in literally 10 months
Jan 25, 2012 4:07PM
Jan 25, 2012 10:48AM
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I don't know if Coach is the premier luxury brand, but it obviously still popular and worth keeping an eye on.
Jan 24, 2012 10:22PM
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Interesting point Jay. I feel like this analysis could be applied to other luxury retailers such as Hermes or Ferragamo, in light of similar holiday sales.
Jan 24, 2012 10:21PM
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Glad to see that Coach is doing well. I do wonder, however, how its competition is doing? Coach is an established name with a large backing behind it. I'm glad outlet stores were mentioned, as they're a huge portion of sales. I'd be curious to see how LV and D&B are doing, not to mention a few of the more expensive brands like D&G or Prada. Does coach have this market tapped almost completely?
Jan 25, 2012 11:51AM
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If you want people to know  you are rich why not just paste your bank statement on your hand bag. 

Oh yeah your not so you buy a Coach to make people think you have money...  As long as people do this, this company will always be making money.
Jan 25, 2012 9:10AM
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I don't see the attraction to Coach products. They don't last and are nearly as expensive as the better brands such as LV, Ferragamo. I think Coach has just about saturated their market.
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