Has Coach Gone Out of Style?

Judging by its stock's drop, Coach (NYSE: COH  ) has severely shaken many investors' confidence today. Is the ugly economy simply too much negative baggage for this venerated leather purveyor?

Fourth-quarter net income increased 4%, to $202.5 million, or $0.68 per share. Coach's total sales increased 9% to $1.03 billion. If you strip out the extra week that benefited its fiscal fourth-quarter results in 2010, Coach's profit increased 18%, and revenue jumped 17%.

Despite these promising results, Coach shares plunged about 6% today, in part because of the company's margin malaise. Coach's gross margin dropped to 71.8% in the most recent quarter, from 73.3% this time last year. Higher costs for Chinese workers and other increasing expenses contributed to this slide. On Coach's conference call, management indicated that investors should expect a flat gross margin this year.  

On a big-picture level, it's easy to see why an investment in Coach wouldn't look so compelling right now. A stalled-out U.S. economy and its high numbers of unemployed and cash-constrained consumers don't bode well for luxury-goods purveyors like Coach and its ilk.

Similar concerns drag on the handbag maker's ritzy peers. Can Tiffany (NYSE: TIF  ) sell as much pricey high-end jewelry? Can Williams-Sonoma (NYSE: WSM  ) continue to peddle a steady volume of expensive kitchenware? Can Nordstrom (NYSE: JWN  ) entice its customers to spend at full price? Consumers let their spending languish in June, cutting their outlays by the most in two years.

These companies will all have to navigate an extremely difficult consumer environment. Shares of all three have also fallen significantly today. Are they bargains or value traps right now? Investors must tread carefully.

When surveying the luxury sector, I consider Coach one of its most stable residents. Its diversified product line and variety of retail channels give the company the widest access to consumers at different income levels.

No one likes to see flat or dwindling margins, but Coach nonetheless boasts a great, solid brand that many consumers aspire to. It's also got smart, nimble management that's already proven itself a great steward in tough times. If you've been coveting shares of Coach, today's beaten-down price could be an opportunity to pocket a position.           

Alyce Lomax does not own shares of any of the companies mentioned. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. The Motley Fool owns shares of Coach. Motley Fool newsletter services have recommended buying shares of Coach. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (4)

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  • Report this Comment On August 02, 2011, at 4:05 PM, David369 wrote:

    A minor dip in the big picture. In 6-7 months it will be back up that 6 and up another 6 or more. One of the few luxury products with name recognition world wide. Unlike most of the others their products are almost affordable.

  • Report this Comment On August 04, 2011, at 2:06 PM, akakroke wrote:

    Today is a buying opportunity and I bought 275 shares. I am not rich and can not afford a Coach bag for my wife but we, my daughters and myself, chipped in and bought her one for Christmas ... wow, EVERYONE notices it! It's like driving a '57 Corvette. I have no doubts about demand for it's products. I see a bright future for this company.

  • Report this Comment On August 10, 2011, at 5:07 PM, finnhemingway wrote:

    coach is old news and recent styles have not been good. people notice, but it is not the brand that it used to be. definitely more aspiratopma; middle class, which has been harder hit, then luxury brand.

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