Could Coach (NYSE: COH), the provider of high-priced luxury handbags, prove to be somewhat insulated against recession? That's what many investors are surely wondering right now.
Coach's fiscal second-quarter net income increased 11% to $252.3 million, or $0.69 per share. (Coach was quick to point out that income from continuing operations increased 21%.) In addition, its net sales increased an impressive 21% for the quarter. Coach also stuck with its guidance for 2008.
Given what the company described as a "tough retail environment," it's certainly arguable that Coach is right when it describes its diversified approach as a way to stave off financial difficulties. After all, despite its reputation for pricey goods, it also offers items at lower prices through factory stores, widening its reach among more types of customers. Although people have often wondered if that would tarnish the brand, in tough times, it seems that it does give it a bit of insurance that super-upscale brands like Tiffany (NYSE: TIF) don't necessarily have.
Indeed, Coach acknowledged that the consumer is strapped right now, with traffic at its stores having flagged during the quarter. However, it also had positive news to share in that regard -- for example, the lower traffic to its stores actually converted well into sales (albeit sales of items with lower price points than last year). Plus, a $400 handbag generated 22% of handbag sales, versus just 13% last year.
It's a common argument that even in tough economic times, many consumers will still buy certain items if they seem worthwhile. If retailers like Talbots (NYSE: TLB), Gap (NYSE: GPS), and Coldwater Creek (Nasdaq: CWTR) continue to struggle, it's easy to guess that uninspiring merchandise isn't helping in the midst of a consumer slowdown.
However, Coach is a premier brand, and trading at just 13.4 times forward earnings sounds reasonable for a company that's expected to report a 22% increase in earnings per share in 2008. Further, the PEG ratio anticipating 17.5% growth for the next five years is also just 0.77. A major consumer slowdown is frightening stuff for many stocks, but if it's a quest for quality you're looking for, Coach makes the grade.
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