Coach, Inc. (NYSE:COH) took a serious hit last week when the company reported disappointing results for the second quarter. Sales in North America have slowed down lately, and the company is clearly feeling the pressure from trendier competitors like Michael Kors Holdings Ltd (NYSE:KORS). But this is still a very profitable company with a valuable brand and plenty of opportunities for growth, so current weakness looks like a buying opportunity from a long term point of view.
A Mixed Bag
Sales in North America increased by 6% during the last quarter, direct sales were 5% higher, but comparable store sales fell 1.7% versus the previous year. Disappointing North American sales have been a recurrent problem for Coach over the last quarter, and this is the biggest reason for concern regarding the company´s prospects in the middle term.
Management cited soft traffic trends as one of the reasons for the disappointing sales figures, and Ralph Lauren Corp (NYSE:RL) provided confirmation about how challenging conditions are for high end fashion retailers on Wednesday. The company reported a 1% drop in comparable store sales for the quarter, the worst same store sales number that Ralph Lauren has reported in the last five years, and the news sent the stock down by more than 6%.
Michael Kors Holdings Ltd (NYSE:KORS) is in fashion right now, and the company has nearly half the revenues of Coach, Inc. (NYSE:COH), so it has a lot of room to continue gaining market share versus its bigger rival. The way things are going, it looks like Kors will continue being a headache for Coach for quite some time.
On the other hand, investors should keep in mind that this is not a zero sum game; there is room for different successful players in the industry. Michael Kors Holdings Ltd (NYSE:KORS) is trendier and more targeted towards younger consumers, while Coach is more on the classic side. So even if they are direct competitors, at some point both companies should be able to grow and thrive together.
Besides, not everything was bad news for Coach, Inc. (NYSE:COH) in the last quarter–the company is doing remarkably well in China, where sales increased by 35% for the quarter thanks to double digits same store sales. In the last year, Coach increased its revenues in the Asian giant by 40%.
The company has been venturing into men´s bags and accessories lately, and performance in that area is looking quite promising too. Sales in that segment increased by nearly 50% in the last year, so, while Coach is losing market share versus Kors in women´s handbags and accessories, the company is going after Ralph Lauren Corp (NYSE:RL) and other high end retailers in the men business.
Coach, Inc. (NYSE:COH) is also going through a transformation, restructuring operations and implementing managerial changes. This can always carry some risks, and it may slow the company for a while until the reorganization is complete. But at the same time, it can be a powerful way to reinvigorate growth for years to come.
In the Bargain Bin
When comparing valuation ratios and profitability margins for Coach versus industry peers like Michael Kors Holdings Ltd (NYSE:KORS) and Ralph Lauren, the company is looking quite attractive. Coach is the cheapest company in the group in terms of P/E ratio and dividend yield, and it also has higher gross and operating margins than its competitors.
The company recently announced a dividend increase of 12.5%, bringing the payment to $0.3375 per share. Coach has been regularly raising dividends over the last years, and the company´s financial strength is out of question, so investors have good reasons to expect growing cash distributions from Coach over the next years.
Bottom Line
Coach, Inc. (NYSE:COH) is being hurt by the competition, and that´s a problem the company needs to address as soon as possible. On the other hand, current valuation is already reflecting those hurdles, and Coach is expanding into new and promising areas for growth. This premium company at a discounted price is looking like a long term opportunity.
The article A Premium Company in the Bargain Bin originally appeared on Fool.com and is written by Andrés Cardenal.
Andrés Cardenal owns shares of Coach. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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