Finally A Reason To Get Behind This Handbag Stock

It's hard not to love Coach (NYSE: COH  ) . They make high-end, quality, handbags. From an investment perspective, it's even harder not to love the stock. However, being a Coach fan has not been easy over the last twelve months. Regardless of how much you believe in their products there's been two instances where the stock fell by more than 10% in a single day.

Tough Competition
This comes as one competitor is really putting pressure on Coach: Michael Kors (NYSE: KORS  ) . Although Michael Kors is relatively new to the public markets, completing its IPO in late 2011, it's been around for thirty years. What makes Kors a bit different is that it gets around half its revenue from retail, but the other half comes from wholesale. Coach only gets around 5% of its U.S. sales from wholesale. Kors' key wholesale partners include some 2,000 department stores in North America, and another 1,000 internationally. 

To combat this, Coach has put together some initiatives that will help reposition the company nicely. Granted the company is still weighted toward women's handbags (60% of revenues), it's making the move to become more of a head-to-toe apparel company.

Coach has new merchandise hitting stores, which includes textured leather. And many of its new products command a higher price. This should help bring in the higher-end customers, which are less susceptible to economic turmoil. The other big advantage to Coach's greater focus on higher-end products is that although it owns some 28% of the U.S. handbag market, it only has around 2% of the $400 plus handbag market. The company is also expected to launch new products in its footwear and watch segments. 

Despite the fear that Kors might be taking market share in the U.S., China still poses a huge opportunity for the company. Coach owns a small part of the market share there, but it does own 17% in Japan. Assuming that it grabs a similar amount of market share in China, that's a $1.3 billion market opportunity for Coach. 

In two quarters so far this year, the company has seen negative North American comps. Hence Coach's plans to get into overseas markets. Coach is looking to increase its retail square footage by nearly 10% over the next year, with a focus in emerging markets. As well, Coach plans to have 200 to 300 shop-in-shops at certain department stores by fiscal 2014 end. 

A step beyond
The rebounding economy hasn't been as fruitful for all companies. This includes fellow handbag maker Vera Bradley  (NASDAQ: VRA  ) . Vera still has some of the most short interest in the market, at around 50%, in part, given Kors' success.

Vera is down 16% year to date, but it's valuation is entering "appealing" range. The stock is trading at less than 13 times earnings,and its PEG ratio is 1.3. Meanwhile, the company is generating a return on equity in excess of 35%. A new CEO is expected to take the reigns over the next couple of months, which should be another big positive for the company. 

The current CEO is more of a "finance" guy, and not so much a "retail" guy. What's more is that he's also the son-in-law of one of the co-founders. An independent, retail-focused, CEO could be just what this company needs. Its products are a bit different from Coach and Kors as well, being focused on more casual products, compared to the leather-focused Coach and Kors brands. 

But if you want to really build a portfolio that's resilient to a weak economy, you have to have a look at Tiffany. Generally, an economy that's good for Tiffany is good for Coach, where both companies tend to perform relatively well in a down economy given its more affluent customer base, which tend to be less affected by economic slowdowns. Analysts expect Tiffany to grow EPS at an annualized 12% over the next five years. 

Tiffany is also focusing on the international segment, with a particular interest in Brazil, Russia and India. The other new focal point for Tiffany is smaller stores, ones that will focus on high-margin, lower-priced items. 

Although Tiffany's dividend yield is at a modest 1.8%, Tiffany remains consistent with upping its payment. Earlier this year the company increased its payment by 6%, marking the twelfth increase in eleven years. 

The bottom line
Coach is transforming itself from a handbag company to a lifestyle company. This includes offering footwear and new accessories. Meanwhile, both Coach and Tiffany should continue to be resilient against a less than stellar economic backdrop. Over the last five years Coach has managed to outperform the S&P 500 by some 50% percentage points. At only 12.9 times forward earnings, Coach is a solid long-term investment for investors.

 

Retailing can be a tough business, especially in the face of major shifts in consumer habits. The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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