3 Big Reasons to Buy Coach

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To celebrate the holidays, we here at the Fool are devoting extra virtual ink to all things consumer-focused in a special section called "The 12 Days of Christmas." Over the coming week, we'll have our "12 Days of Content" surrounding consumer-focused names that look set to profit or perish from the holiday cheer.

Consumer stocks are now as risky as they've ever been. Unemployment's historically high, consumers are spooked, and subpar earnings abound, as companies pay the price for lost competitive advantage or fiscal irresponsibility. But tough times can offer investors the best chance to buy stocks

Even if stock prices are low, investors still need to be careful. Many companies simply won't survive the recession in their current form. However, thinning the herd of weaker competitors should lead to big winners in the consumer space once the economy recovers. In this article, I've highlighted three reasons to stuff your stocking -- or your handbag --with shares of luxury-goods leader Coach (NYSE: COH  ) .

1. Comeback kid
Despite holding a leading share of the U.S. premium handbag and accessories market, Coach hasn't escaped the weakness in same-store sales that's plagued retailers across the price spectrum, from Gap (NYSE: GPS  ) to Nordstrom (NYSE: JWN  ) and even Costco (NYSE: COST  ) . More recently, however, Coach's "accessible luxury" products appear to be regaining their appeal with well-heeled consumers.

In the company's fiscal 2010 first quarter, which ended in September, North American same-store sales declined a mere 1%, helped by new collections and more affordable price points. And direct-to-consumer sales -- the bulk of Coach's business -- increased 10%, buoyed by sales to China.

Coach expects even brighter news going forward. According to a recent Barron's article, CEO Lew Frankfort believes that the company can grow sales at a 10% annual clip given a stronger economy, with earnings increasing at an even faster rate.

Under that scenario, the stock's current-year P/E of 17.3 (a discount to the market) appears fair at the worst, and a bargain under the best of circumstances.

2. A lean, mean operating machine
Let's face it: Even though Coach benefits from what is arguably a cadre of loyal and relatively well-to-do consumers, a 2010 financial shock, whether to the real economy or the market, could postpone the company's return to growth.

Fortunately, Coach can withstand a prolonged consumer slump. First, the company is practically debt-free and boasts more than $3 per share in cash. In other words, shareholders can be confident that they aren't walking into a cash-flow nightmare a la Talbots (NYSE: TLB  ) .

Moreover, management's past mettle shines through in industry-beating operating metrics. Although down a few points from recent years, Coach posted a whopping 72.3% gross margin in its recent quarter. Return on equity, meanwhile, has averaged greater than 40% over the past five years, besting the likes of Kenneth Cole Productions and Polo Ralph Lauren (NYSE: RL  ) . Whether the retail environment ahead proves robust or lackluster, Coach appears to have the operating momentum to outshine competitors.

3. International growth
When it comes to global footprint, Coach's patterned flats hardly match up to Nike's (NYSE: NKE  ) Air Jordans. But with only about 28% of net sales hailing from outside the U.S. -- compared to 58% for Nike -- Coach has greater room to expand.

China, in particular, looks like a growth gem. The company recently increased its Chinese locations to 33. That's a tiny change-purse worth of business compared to its several hundred North American stores, but the number could easily triple over the next five or so years. Plus, China same-store sales have been growing by double digits, and management estimates that the market for imported bags and accessories shot up 40% during the last year. Sweet, right?

What do you think?
We've made our Foolish case on Coach -- now it's your turn. Is Coach a buy on product strength and growing consumer confidence? Or do economic headwinds overshadow the company's merits? Share your comments below.

Follow along with our "12 Days of Christmas" article series:

Coach and Costco are Motley Fool Stock Advisor recommendations. Costco is also an Inside Value recommendation. The Fool owns shares of Costco.Try any of our Foolish newsletters, free for 30 days.

Fool contributor Mike Pienciak doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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  • Report this Comment On December 16, 2009, at 11:40 AM, adnilacnodnem wrote:

    What is up with you guys??? If you would do your REAL research you would know that JWN is poised to be the true leader in the retail sector... Pos cash flow... own the credit Denver Credit... 17% growth .com solid performances in FLS...great balances on inventory with fast turns, and dividends quarterly... WTF????

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