A stock with margin growth
First in our list is luxury brand Coach, Inc. (NYSE:COH), a pretty interesting case. Although the stock had been down for a few months, it has been showing considerable signs of recovery in the past days. After the announcement of stronger-than-expected third quarter results on April 22, the stock was up by almost 10% within a day and continued to escalate. However, the stock still offers a relatively low P/E ratio, since it trades at 15.27 times P/E, less than half the ratio offered by its main competitor, Michael Kors Holdings Ltd (NYSE:KORS), which trades at 31.35 times P/E. This stock looks even cheaper compared to its peers, when its forward P/E of 13.8 times and PEG ratio of 1.4 are taken into account.
Several reasons lead me to believe that Coach is a good long-term investment. Coach, Inc. (NYSE:COH) is an established fashion (mainly handbag and accessories) brand, ranked by Forbes as the 51st most powerful brand in 2012. Its fame for high-quality products that compete with Louis Vuitton or Chanel attracts an oncoming public, willing to pay a premium for the company´s creations. Expansion of its worldwide distribution model, while penetrating under-exploited markets, combined with innovative products and persuasive prices, should drive comps and margins growth in the long-run. The recently-announced Q3 results arrived better than expected, portraying an optimistic outlook for Coach. Sales increased by 17% to $1.11 billion and EPS by 24%, year-over-year, reaching $0.84 per share. In addition, the board passed a 13% increase in dividends, now paying $1.35 per share annually. The company now yields 2.3% in earnings, almost doubling the 1.2% industry average.
Focus on overseas markets, like China, relieves considerable pressure exerted by the situation in the U.S. Comps grew nearly 60% in China during Q3, while expected sales for the full year amounts to $300 million, at least. Substantial double-digit upsurges were also registered in Taiwan, Singapore, and Japan. Current gross margin of 73.8% widely surpasses other companies’ like Ralph Lauren and Michael Kors Holdings Ltd (NYSE:KORS), both offering margins under 60%. Operating margin is also considerably high, reported at 30.4% last quarter, close to the 10-year high of 38%, and way above most of its competitors that average an 8.3% margin.
As other analysts, I believe that the upside on Coach, Inc. (NYSE:COH) beats the risk it carries. Trading at bargain prices, this is definitely a stock to consider adding to your portfolio.
A leading brand
Coach, Inc. (NYSE:COH)´s number one competitor, Michael Kors Holdings Ltd (NYSE:KORS), also deserves a look. Last quarter’s results were also considerably strong, driving the stock to a 52-week high of $64.84 after the earnings were announced in February. The price is now down by about 12%, trading at $56.26 (Apr. 29). Exchanging at 31.58 times its earnings, doubling the industry 16.6 times P/E average, Kors seems a little overvalued. However, there are several reasons why I like this business and would recommend buying now, despite its valuation.
For starters, Michael Kors Holdings Ltd (NYSE:KORS) is an established, actually leading, brand worldwide, currently stronger than ever. People know the name and are willing to pay a premium for its goods. This advantage is certainly reflected in its financials, as gross margin reached 60.2% during the last reported quarter. This leads us to a second reason to believe that this company will grow further: its balance sheet. Last quarter, maintaining a five-year growth trend, the firm reported a 41.1% increase in comparable-store sales (YoY) and an expected 20%-25% extra growth in the fourth quarter, to be announced early June. Revenue grew 70% (YoY) to $637 million, principally in account of Kors’ luxury business. Earnings reached $0.64 per share, rising 220% from last year’s same quarter and surpassing consensus estimates of $0.41 by 56%. Full year expected results also look quite encouraging, as the firm’s management expects EPS of $1.80-$1.82, up about 130% from last fiscal year’s. Revenue is also projected to rise by 61%, up to $2.1 billion.
Kors’ financials are strong. This is most likely a reflection, asides from the brand name, of effective management. CEO, John Idol, has an impressive track record in the segment, having previously worked for Ralph Lauren and Donna Karan. His five-year expansion plan for the company includes the opening of 100 stores in China, the fastest growing luxury market, which is expected to provide 20% of this segment’s customer base by 2015. Already in motion, the enlargement plan signified a 28% increase in the number of shops over the past 52-weeks (now attaining a total of 297 stores).
Finally, as stated by investorplace.com’s editors, Kors also “expects to implement several drivers to increase margins over the medium to long term: (1) shifting the mix of retail/wholesale from its current 50/50 distribution to a 75/25 mix, (2) increasing the category mix of accessories from 75% to 80% of total sales over the next six to 18 months, boosting both gross and operating margins, and (3) bringing the ecommerce business in-house to become Michael Kors Holdings Ltd (NYSE:KORS)’ highest-margin business.
So while it is natural to assume that their blistering pace of sales growth must decelerate, KORS believes it still has fuel to burn.”
