Founded in 1941, Coach (TPR -1.60%) is the company that handbag companies aspire to be. With a wide reach and a well-respected brand, Coach is on its way to more than $5 billion in sales for its fiscal 2013. And with recent expansions into men's accessories and clothing, the company is now looking for expansion opportunities overseas and domestically. While the pace of expansion might seem aggressive for a lesser company, Coach has shown time and time again that it's up to the challenge.
The case for Coach
Coach looked to Louis Vitton early on to mimic that brand's control over its destiny. Selling through limited locations and at specific price points meant that customers would see the brand as having more value than competitors' brands.
That sentiment has resonated with consumers, and the brand now possesses incredible strength as evidenced by the company's ludicrously high gross margin of 72%. The company does a great deal of work to fight counterfeiting and to protect a luxury brand that consumers have come to love.
That sense of pride in the product has flowed down to employees as well, who give the company high marks for culture, benefits, and professional development opportunities.
Coach makes financial performance look easy. Over the past five years, Coach racked up a median return on capital of 43%, along with 12% average annual revenue growth.
Risks to consider
The biggest challenge for Coach is protecting its brand value. In the world of fashion, tastes can be fleeting and all too fickle. Companies like Michael Kors (CPRI -1.67%) are expanding at astounding rates, and challenge Coach's core product lines. With the economy slowly righting itself, more and more companies are going to jump on the bandwagon, and Coach is going to have to find new ways to differentiate itself.
Coach also faces concerns that its labor facilities in Asia may be lacking in transparency. The company made a move out of China and into other southeast Asian countries after Chinese labor costs grew too high. If the company wants to maintain its image, it may have to do a better job addressing those concerns.
The Foolish bottom line
While I applaud the move into men's products, I worry that the new line will be a diversion for the company and that innovation in handbags will get forgotten in the shuffle. That's a concern, not a current problem, so for now, I'm very happy with the work that Coach is doing.
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