Investors Jump Off Coach

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After it announced less-than-stellar earnings this morning, investors started bagging Motley Fool Stock Advisor pick Coach (NYSE: COH  ) . Unfortunately, their concerns seem all too understandable.

Coach's fourth-quarter net income fell 32% to $146 million, or $0.46 per share. Revenue dropped roughly 1% to $778 million.

Interestingly, Coach said it did not discount products in retail stores this fiscal year, yet gross margin still fell to 70.4% of sales, from 75.9% this time last year. The company said that maintaining full prices boosted "robust sales" in its factory channel. Does that imply that nobody wants to pay full price for Coach at a retail store? (Color me shocked.)

To further its growth ambitions, Coach said it's acquiring its retail stores in China, in what the company called a long-term investment. Coach can certainly justify such expenditures, even with profits down and sales stagnant, by pointing to its strong cash flow and negligible debt. And in fairness to the retailer, tough times can often present the best opportunities for a company to invest in its future -- however nerve-wracking such spending may be for skittish investors.

The same day Coach reported its numbers, we saw new evidence that consumer confidence continues to ebb (much like last month's disappointing data). Amid this new frugality, luxury retailers like Coach, Nordstrom (NYSE: JWN  ) , and Saks (NYSE: SKS  ) aren't faring well. And if shoppers keep their wallets shut, certain high-end retailers such as Williams-Sonoma (NYSE: WSM  ) may not stand a chance. At least in the short term, we might be facing the death of luxury.

Nonetheless, Coach is a good candidate for survival. It's a venerated brand known for high-quality products, and it does have bags of cash. Its strong sales also demonstrate that Coach hasn't suffered the sort of declines currently taking a bite out of downmarket Crocs (Nasdaq: CROX  ) . None of which means today's tidings won't leave investors pondering a jump to safer retail havens. Champion of cheap Wal-Mart Stores (NYSE: WMT  ) must be looking awfully tempting.

I still believe Coach could be a solid stock for long-term investors -- assuming consumers keep viewing Coach's goods as luxuries deserving of their hard-earned dollars.

Is Coach done for, or just taking a breather? Chime in with your thoughts in the comment box below.

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Coach is a Motley Fool Stock Advisor recommendation. Wal-Mart is an Inside Value pick. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool's disclosure policy is a luxury everyone can afford.

Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On July 28, 2009, at 8:59 PM, bobdagolfer wrote:

    I recently went to a Coach store to purchase a purse for my wife and was told that they do not discount at their couch stores but if I was looking for a discount that I could go to the Macys or Nordstoms in the same mall. If they know about discounts in the local mall and even point them out I would think they would want to at least compete with stores within the mall.

  • Report this Comment On July 28, 2009, at 11:32 PM, spinindog wrote:

    It's a bit of a catch 22. If you discount, you are no longer a luxury brand.

    The brand won't die, it just won't be marketing to the typical American who values large quantities of crap over a couple of quality items in their life.

    I hate to rag on my fellow Americans, but when times are good, they like to buy great brands when they can afford them. They aren't interested one bit in the quality of the item, they just want the brand name. That's why you see oversized logos on expensive brands.

    Coach will hang around, selling to those who value quality, until the economy gets better and the masses can start buying the brand again.

    BTW, I'm not a snob, I carry a regular black bag that came with my laptop. I'm just making an observation here.

    Anyway, good for Coach for protecting their brand name.

  • Report this Comment On July 29, 2009, at 12:25 AM, cyrilblair wrote:

    I also thought Coach never discounted, either in their stores or in department stores. I thought that's what their outlet stores were for. But last time I was in Macy's, sure enough, some of them were on sale.

    Personally, I have no interest in owning a new Coach bag because they're ugly now and have been for years. They used to have such a classic (and classy) image. I'm certainly hanging on to my old ones, though. I wish they would go back to their old roots, when they were like a cheaper Lambertson Truex.

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