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A Can't-Lose Quarter for Luxury's Magic Retailer

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As prudent investors ponder luxury-goods companies' fate in an uncertain economy, at least one purveyor of swanky fare still seems to be living the high life. Coach (NYSE: COH  ) just bagged another solid quarter.

The maker of hotly desired handbags and other leather goods increased net income 37%, to $158 million, or $0.50 per share. Even excluding a one-time charge from this time last year, net income still jumped 28%. Gross margins bounced to 74.1%, from 70.9% in the year-ago period, indicating that Coach's new merchandising strategy is playing well with strengthened consumers. Revenue surged a healthy 12%, and North American comps increased a heartening 5.1%.

Although the Japanese market flagged, with sales falling 1%, Coach's global outlook seems appealing. Chinese retail comps increased at a double-digit rate, and Coach is opening its first mainland China flagship store in Shanghai this week. European expansion plans include new stores in France, the U.K., Ireland, Spain, and Portugal.

Shareholders have even more to celebrate. Coach is doubling its dividend to $0.60 per share annually, and it has authorized a buyback of $1 billion of its stock by June 2012. That would represent more than 7% of outstanding shares at current prices.

In general, investors should tread carefully with retail and luxury-goods stocks, especially given the recent torrid rally. Luxury stocks such as Williams-Sonoma (NYSE: WSM  ) , lululemon (Nasdaq: LULU  ) , Saks (NYSE: SKS  ) , Abercrombie & Fitch (NYSE: ANF  ) , and Nordstrom (NYSE: JWN  ) could be risky bets right now. Each of these discretionary names trades at a high multiple to future earnings. If the companies don't meet those expectations, their stocks could face a substantial correction.

An impatient populace, giving in to its pent-up purchasing desires, might explain the current surge in shopping. However, the good-looking quarters many consumer-facing companies have posted reflect very easy comparisons to last year, when shoppers kept death grips on their wallets. As we've noted many times before, high unemployment and a still-lousy housing market should lead realistic investors to question just how sustainable luxury spending can be -- and choose their investments in this sector with great care.

Although shares of Coach were a bit cheaper last quarter, when investors balked at its results, they still look more palatable than some other names in the luxury group. I'd rather have stock in a venerated company like Coach at 17 times forward earnings than a relative newcomer like lululemon, which is trading at an astounding 40 times forward earnings at the moment.

Coach is a high-quality company with copious cash on its balance sheet, very little debt, and savvy management, making it a rock-solid stock for long-term portfolios.

What do you think? Should you load up on Coach now? Use the comment box below to chime in.

Coach is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days.

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

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