Good numbers in the last quarter
It’s impressive to note that Coach, Inc. (NYSE:COH) managed to beat analyst estimates when most people were expecting weaker results in its last quarterly earnings report. The company’s performance in the last year has been dismal, with its share price falling from $75 in May 2012 to $46 in February. Nonetheless, at a time when most people had written Coach off in favor of its rivals, the company has managed to report superb growth, beating market estimates.
In the latest quarter, Coach’s sales increased from $1.1 billion in the year-ago period to to approximately $1.2 billion. Its net income was up 6.2% from last year to $239 million for the quarter. Earnings per diluted share increased by 10% to $0.84.
Sales growth was due to increased traffic and transactions during the holiday season, coupled with improvements in Coach’s online and mobile businesses. Other reasons include solid performance by Coach, Inc. (NYSE:COH)’s men’s business and footwear division, which was relaunched in its North American stores last quarter.
Right focus
Coach’s most important market is North America, which accounts for nearly two-thirds of its total sales. In its last quarter, however, Coach’s total sales in the region increased by a mere 7%. As compared to competitor Michael Kors Holdings Ltd (NYSE:KORS), Coach’s performance in the region is lackluster.
In its latest quarter, Michael Kors Holdings Ltd (NYSE:KORS) recorded a phenomenal 41% growth in comparable-store sales in North America, backed by a 75% year-on-year increase in the wholesale segment in the region. The company has increased its presence in the global-luxury market by using social media and participation in runway shows. If Michael Kors Holdings Ltd (NYSE:KORS) manages to achieve its long-term target for 20% to 25% growth in revenue, Coach’s market share may suffer.
Given the situation in North America, what is impressive about Coach, Inc. (NYSE:COH)’s business approach is its increased focus on key international markets, such as China. China, with its ever growing number of ultra millionaires (1.4 million households in 2011) is a haven for western luxury brands. As early as 2008, China accounted for 25% of the world’s luxury product sales. High demand coming from the Chinese market can offset Coach’s declines in North America.
In its recent quarter, Coach, Inc. (NYSE:COH)’s sales in China increased by as much as 40%. Continued growth is expected in the quarters to come. Coach is planning to increase its presence in China in the next quarter by adding seven new stores to its current total of 118 in the country.
Business policy
One of the things that sets Coach apart from its peers is the amount of money it returns to its shareholders. The company is known for its regular share buyback policy. Since 2005, the number of Coach’s outstanding shares has gone down by 107 million. This implies that each investor in Coach, Inc. (NYSE:COH) now receives a bigger chunk from its earnings per share.
The company also pays dividends to its common shareholders. In its last quarter, the company announced an increase of 13% in its dividend, which is now $1.35 per common share. This makes its current dividend yield a decent 2.3%.
The only company in the luxury segment that comes close to Coach, Inc. (NYSE:COH) in this regard is Fossil Inc (NASDAQ:FOSL). In 2010, the luxury-watch maker announced its “$750 million program,” wherein the company planned to repurchase shares worth $750 million by 2013. This represents about 25% of the company’s total capitalization.
In December 2012, the company announced a new plan under which the company can buy back shares worth up to $1 billion from its outstanding shares at any point in time. In its last quarter, Fossil Inc (NASDAQ:FOSL) repurchased shares worth $65 million. In its next quarterly earnings, to be released in early May, earnings per share are expected to increase by 4.3% to $0.97 while revenue is expected to grow by 10.4%.
In the long run, Fossil Inc (NASDAQ:FOSL) has very bright prospects. The company has plans to expand its operations in Asia and Europe. The expansion plans, coupled with improved partnerships with luxury brands such as Michael Kors and Karl Lagerfield, will help drive Fossil’s growth in the quarters to come. A very strong balance sheet, a low debt-to-equity ratio of 6% and a relatively low P/E of 17 are a few other reasons that make this stock a good buy.
Summing it up
If the article didn’t give you enough reasons to buy Coach, here are a few more. Coach is trading at a relatively low P/E of 15.5, making it undervalued at present. Kors, for instance, Coach’s biggest rival in the handbag and accessory market, trades at an extremely high P/E of 33.5.
Secondly, despite facing headwinds in the past few quarters, Coach, Inc. (NYSE:COH) still commands over 10% of the global-luxury market and approximately 30% of the US-luxury market, both bigger shares than that of Kors. If Coach’s clothing line, which is to be launched in the fall, is a success, the company will soon be the leader of the game making it an even bigger success. For all intents and purposes, this is the time to hold onto Coach!
The article 3 Reasons to Buy This Luxury Brand originally appeared on Fool.com and is written by Sonam Chamaria.
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