Keep on Coveting Coach

Coach (NYSE: COH  ) shares are a bright spot in today's lackluster market. The luxury handbag maker has bucked downer consumer trends to report impressive quarterly results.

Fiscal first-quarter net income increased 34% to $189 million, or $0.63 per share. Sales surged 20% to $912 million. In even better news, Coach's gross margin increased to 74.2%, from 72.3% one year ago.

Everybody's watching how well companies perform in the U.S., and Coach bagged a victory right here at home. North American comps increased by 8.5%. Not to be outdone, China's comps rose at a double-digit rate.

There are plenty of stocks to avoid in the retail and consumer-goods sectors these days, as tighter consumer spending threatens to cull weaker names from the herd. Investors should avoid a train wreck like RadioShack (NYSE: RSH  ) , and run from a stock like J.C. Penney (NYSE: JCP  ) .

Coach looks more tantalizing -- and defensive -- than high-end department-store stocks like Saks (NYSE: SKS  ) or Nordstrom (NYSE: JWN  ) . These outlets face a lot of competition from one another, along with the possibility that cash-strapped consumers will trade down to discount rivals like Target (NYSE: TGT  ) and Costco (Nasdaq: COST  ) .

In contrast, Coach's strong, revered brand gives solid reason for savvy investors to keep the faith. My Foolish colleague Dayana Yochim recommended buying Coach for our 11 O'Clock Stock series, and Coach is now the second best performer of the bunch, up more than 30% since August. Avoiding shares of a high-quality company like this one because it looks a bit pricey can be a major mistake.

Coach trades at 19 times earnings, which may sound expensive on the face of it. After all, you could get Nordstrom for 16 times earnings, and discount retail rival Target's P/E is just 15.

Still, Coach has maintained incredible growth and impressive competitive savvy during consumers' difficult days. Sometimes, paying a slightly higher price for stock in a high-quality, well-run company can be a good move in the long run. Add Coach to our My Watchlist function if you'd like to admire the company from afar and wait for a cheaper entry point. Just remember -- you could end up regretting the delay.

Costco is a Motley Fool Inside Value recommendation. Coach and Costco are Motley Fool Stock Advisorpicks. The Fool owns shares of Coach and Costco. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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