In this article, let's take a look at Coach Inc. (COH, Financial), a $10.21 billion market cap company that designs, makes and markets fine accessories for women and men, including handbags, weekend and travel accessories, outerwear, footwear and business cases.
Key drivers
Coach has several competitive advantages such as a strong recognition of its brand, capital efficiency, its pricing power and its sourcing and distribution channels. The first two (capital efficiency and strong brand) have been key drivers in the past, and we think they will continue in the future.
Products
The products in which the brand impacts in a stronger way are bags and leather accessories. The firm plans to increase market share in the footwear and ready-to-wear products; but accessories will continue to be the core of the business. Further, we think that the men's business (13% of sales) would have a major impact in the company´s revenues.
International business
The company has two reportable segments, North America and International. The international business is still below the maximum potential so if Coach pays more attention, an opportunity to grow is possible.There are several promising regions, like the Japanese market, where it could offer American styles with high-quality at attractive prices.
In other countries such as China, Coach has also an upside potential. From $100 million in 2010, the company projected a huge growth of five times in fiscal 2014. We have to take into account, that operating costs are lower in this giant country so Coach could obtain higher operating margins. On the other hand, in Europe, operations are still low because it has a small number of shops.
Other strategies
Coach plans to be a more flexible company so in this order it is developing lifestyle categories such as footwear, watches and outerwear.
Revenues, margins and profitability
Looking at profitability, revenue declined by 7.08% and led earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.63 vs $0.84).
The gross profit margin is currently high at 73.91% while its net profit margin of 6.62% is similar to the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| COH | Coach | 32.28 |
| GIL | Gildan Activewear Inc | 17.35 |
| FOSL | Fossil Group Inc | 35.39 |
| LULU | Lululemon | 22.27 |
| CRI | Carter's Inc | 22.14 |
| Ă‚ | Industry Median | 9.13 |
The company has a current ROE of 32.28% which is higher than the industry median. Also, it is higher than the ones exhibit by Gildan Activewear Inc (GIL, Financial), Lululemon (LULU, Financial) and Carter´s Inc (CRI, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So the company has a very good ratio as well as Fossil Group Inc (FOSL, Financial). It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 13.2x, trading at a discount compared to an average of 23.0x for the industry. To use another metric, its price-to-book ratio of 4.15x indicates a premium versus the industry average of 2.02x while the price-to-sales ratio of 2.14x is above the industry average of 0.81x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $14,222, which represents a 7.3% compound annual growth rate (CAGR).
Final comment
Coach plans to open stores in key markets across Asia and Europe. It can take Japan as a guideline so we think there is still room for the firm to gain market share in other regions. Further, the men´s segment made huge progress.
The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like John Hussman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), David Rolfe (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), John Rogers (Trades, Portfolio), James Barrow (Trades, Portfolio), Brian Rogers (Trades, Portfolio) and David Dreman (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
