Bag This High-Class Stock

Even though Coach (NYSE: COH  ) delivered impressive quarterly results yesterday, investors still dropped the stock like a frumpy bag.

Fiscal second-quarter net income increased 11%, to $241 million, or $0.75 per share. Coach's sales increased 11% to $1.07 billion. Gross margin ticked up a teensy bit year over year, from 72.1% to 72.4% of sales. That margin stabilization was due largely to cost reductions, and it more than offset aggressive promotional activity and weakness in full-price sales. On the negative side, Coach revealed reduced shipments of products into department stores.

In more heartening news, Coach reported strength in North American sales during the holidays, with comps up 3%. The increase in comps is solid news for a sector that's been ravaged by consumer cutbacks.

Granted, luxury stocks should make investors nervous in these uncertain economic times, as retail observers wonder whether we'll see a return of the bling anytime soon. Stocks like Nordstrom (NYSE: JWN  ) , Williams-Sonoma (NYSE: WSM  ) , Blue Nile (Nasdaq: NILE  ) , and Tiffany (NYSE: TIF  ) make me uneasy, given consumers' apparent reluctance to spend lavishly. An enduring company like Costco (Nasdaq: COST  ) , which also provides luxury items at discounted prices, strikes me as a more solid idea than many higher-end stocks.

Despite Coach's position in the precarious luxury-goods market, though, I tend to think that this particular stock is actually a great long-term investment. It's got good management; CEO Lew Frankfort has been positioning the company for the "new normal" economy, launching lower-priced lines like Poppy. Meanwhile, Coach has a venerated brand, a solid $1.1 billion in cash, and a negligible $24.3 million in debt. Coach's strong financial standing enabled it to repurchase $300 million of its stock in the quarter; such buybacks can be a good move for shareholders if a stock is undervalued.

Coach said in its conference call that it's still gaining market share, and in a relative retail anomaly these days, it's actually opening stores, including some in China and Japan. Coach achieved at least 10% comps in China, and management was excited about "great potential with [China's] emerging consumer group" and faster-than-expected growth, both of which have led the company to accelerate its expansion there. China could become a great place for Coach to prosper.

Coach is trading at 18 times trailing earnings. That doesn't sound unreasonable compared to, say, Tiffany, which is trading at 35 times earnings, or Nordstrom, which has a price-to-earnings ratio of 23. Coach is still a keeper, and it shows no signs of falling out of fashion anytime soon.