Coach (NYSE: COH ) has become a modern-day Rumpelstiltskin. But instead of turning straw into gold, the luxury retailer is increasingly turning fabric and leather into cash.
Coach posted strong second-quarter results this morning. Net income rose to $95.4 million, up 53% from $62.4 million in the same quarter a year ago. Executives attributed the earnings boost to a 33% rise in net sales combined with improvements in operating margin. Indeed, Coach had its best quarter ever for operating margins, generating $0.39 of income from its core business for every dollar of sales.
For comparison's sake, consider that purveyors of other luxury items, such as Tiffany (NYSE: TIF ) , The Sharper Image (Nasdaq: SHRP ) , and Sotheby's (NYSE: BID ) , have a hard time generating $0.10 of operating income per dollar of revenue.
Coach is also a cash-generating machine and, according to management, created $158.3 million in free cash flow during the holiday quarter. (The company doesn't release its cash flow statement with its earnings, tsk tsk.) Coach ended the quarter with $373 million in cash vs. just $3.4 million in debt.
Investors should be heartened by Coach's use of its stockpile. It has $65 million allocated for share repurchases through 2006 and has already bought back more than 1.5 million shares. It is also spending on expansion, and opened three new U.S. retail stores and three new retail locations in Japan during the second quarter. Plans call for a total of 20 new stores in the U.S. and seven new stores in Japan before the end of the fiscal year.
New locations boost sales. If Coach can keep its margins high -- which seems likely -- earnings should also continue to grow. With its projection of full-year 2004 earnings of $1.20 per share, Coach could grow the bottom line by at least 45% over fiscal 2003.
There are so many things to like about Coach, except its valuation. Trading at 30 times forward earnings gives the stock some headroom, but, sadly, not much. As with the queen who discovered that the price for spinning gold was far too high, investors may find the cost of hitching to Coach's bandwagon doesn't justify the expected returns.
Tim Beyers doesn't own shares of any of the companies mentioned, but he longs to make enough cash to actually afford Coach products.