Coach, Inc. (NYSE:COH), the New York-based maker of handbags and other accessories, is back on track. The company reported better than expected quarterly earnings and raised its annual dividend by 13%. Investors cheered the news: Coach’s shares went up as much as 13% when earnings were finally released.
Results and strategy are on the right path.
The numbers were indeed surprising. Third quarter net income rose by more than 6%, total revenue for the quarter increased by 7%, international sales rose 6% (thanks to a 40% rise in Chinese sales), and same-store-sales in North America were up by 1%.
Besides (and most importantly), the company is making strategy changes in the right direction. Coach, Inc. (NYSE:COH) is in the process of repositioning itself as a “global lifestyle brand”, and hence expanding its product line from menswear to shoes. As a matter of fact, the company’s shoe business, launched less than two months ago, is growing so fast that now represents 12% of the company’s total turnover sales.
Coach looks relatively cheap!
You might think that those good results are “normal” for a correctly managed luxury goods company. After all, a younger company such as Michael Kors Holdings Ltd (NYSE:KORS) is expected to grow Year over Year (YoY) sales by more than 60% in 2013 (and quarter to quarter by an astonishing 20%). Even more exclusive brands such as Hong Kong-listed Prada is expected to increase sales by more than 20% YoY. That said, Coach is being valued by the market at a fraction of what those companies sell for.
To see how wide the valuation gap is, let’s take a look at a few multiples. While Coach, Inc. (NYSE:COH) trades at 2013 7.6 times EV/EBITDA and 13.5 P/E, Michael Kors Holdings Ltd (NYSE:KORS) sells for 2013 22 times P/E. Ralph Lauren sells for 2013 10.5 times EV/EBITDA and 21 P/E. A huge price difference. Dividends are also in favor of Coach, which is paying a 2.4% cash dividend yield. Kors pays no dividends at all, and Ralph Lauren Corp (NYSE:RL) pays you a 1% dividend yield.
Bottom line
The luxury sector is growing fast, above all in emerging markets, but some companies (like Kors) are just selling for a price that entirely discounts such expected growth. Other companies, like Ralph Lauren Corp (NYSE:RL), are over-pricing their current growth and earnings power. Meanwhile, Coach, Inc. (NYSE:COH), at its current valuation level, seems to be the perfect combination of correct strategy, growth and profitability.
As I always say, price is what you give, and value is what you get. Paying too much (even for a good thing) can generate years of portfolio under-performance. Avoiding such thing is the job of every stock picker. In a few words, if you like luxury, go long Coach, Inc. (NYSE:COH).
The article Luxury at the Right Price originally appeared on Fool.com and is written by Federico Zaldua.
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