Does Coach Have a Fashionable Future?

You'd think double-digit growth for a retailer would warrant a rally in its stock price -- especially in an economic environment where many retailers are reporting falling comps and lowering guidance. Alas, this wasn't the case for Coach (NYSE: COH); the stock plummeted by more than 10% yesterday on future growth concerns.

I've had my doubts about this company's long-term potential, but I think it provides a solid investing opportunity at its current valuation.

Despite sagging consumer spending, the luxury purse and accessory retailer reported a 28% increase in sales and a 32% boost in earnings from continuing operations. The company benefits from targeting a wealthier class of shoppers, who may be more immune to a slowing economy. But many other higher-end retailers, like Liz Claiborne (NYSE: LIZ), Coldwater Creek (Nasdaq: CWTR), Talbots (NYSE: TLB), and Chico's (NYSE: CHS), have struggled for some time, having simply lost sight of what their customers are looking for. This gives me reason to believe that much of Coach's success stems from its ability to offer the right mix of products.

Coach's powerful brand name and ability to deliver must-have items season after season has allowed same-store sales traffic to grow 50% in North America over the past five years. It's experienced weakening traffic patterns in the U.S. over the past few weeks, but the 19% increase in comps this quarter shows why management continues to see its largest opportunity in this region. Other retailers, such as Fossil (Nasdaq: FOSL), are banking on international operations to fuel future growth. However, Coach is still implementing strategies to continue rapid growth in North America.

While the company did slash its expected growth in the handbag business from 20% to 10%, Coach has expanded into the accessories and jewelry business. These new categories, along with its footwear and lifestyle collections, should help deliver strong top-line growth.  

Coach was a hot gift for teens last Christmas, which concerned both me and fellow Fool Alyce Lomax. We feared the brand could potentially be tarnished, since its core consumer is a relatively wealthy woman, rather than a middle-class high school student.

This shift, in fact, may be one reason why growth is waning. But compared to the competition, Coach has a proven record of knowing what its customers desire. Growth will slow in the future, but I believe this company remains a solid investment at the current price. 

For related Foolishness:

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