Coach Rides Again

Coach (NYSE: COH  ) today reported third-quarter earnings, which were a mixed bag. However, the stock has popped today, so investors found some things to like about the company’s results.

Third-quarter net income fell 29% to $114.9 million, or $0.36 per share. The company took a one-time charge of $0.03 per share related to cost-cutting initiatives. Total sales decreased 1%, to $740 million. Gross margin declined to 71%, compared to 75% a year ago, as the company instituted deeper factory store promotions and introduced less expensive products in its full-price stores.  

If you’re wondering what the good news is, Coach's adjusted earnings did beat analysts’ expectations by a penny, and the firm also said it’s initiating an annual dividend of $0.30 per share. The company does have plenty of cash on its balance sheet and negligible debt, so a dividend looks manageable and certainly does sweeten the deal for long-term shareholders. The company also repurchased 3.6 million shares during the quarter.

It’s been a tough ride for many consumer-goods companies, and the luxury market has been in free-fall, stressing out many purveyors of high-end goods, including department store retailers such as Nordstrom (NYSE: JWN  ) and Saks (NYSE: SKS  ) . Coach, too, has suffered. However, CEO Lew Frankfort said he sees signs of stabilization in Coach’s same-store sales, which have been hovering at pre-Christmas levels in North America. That's a glimmer of hope, anyway.  Still, North American comparable store sales did decline by 4.2% in the quarter, which isn’t exactly good.

A lot of retail and consumer-goods stocks seem way too speculative for my blood in the current economic environment, especially when they’ve struggled for years, or have displayed faddish growth; I’ve been very bearish on companies such as Borders (NYSE: BGP  ) , Talbots (NYSE: TLB  ) , and Crocs (Nasdaq: CROX  ) , for example. I believe the economic headwinds are very serious and investors need to be very careful and seek out true long-term leaders with strong balance sheets.

Coach strikes me as a great contender for that honor, though, with its respected American brand, reputation for quality, and strong balance sheet. As I said in January, if rivals get wiped off the scene, Coach will have even more advantage. Consumers may have a tight grasp on their purse strings now, but I believe Coach will be a survivor. I think investors could do a whole lot worse than buying and holding shares of this classic company for the long term.

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Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

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  • Report this Comment On April 21, 2009, at 11:33 PM, BrodieMan720 wrote:

    The nicest thing about Coach right now is by lowering prices, they can target a younger market to draw them in for longer term purchases. They have such a good brand that the quality of their products will help maintain those younger customers. I'm stoked about the dividend also. Some of the best news I've woken up to in a while.

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