Every once in a while, one of those stocks that seems like everybody's sweetheart suddenly suffers from a dose of investor doubt -- and today it happens to be Coach (NYSE:COH). The high-end retailer may have reported double-digit increases in sales and earnings for the third quarter, but that wasn't enough for investors, who were apparently expecting just a little bit more.
Coach reported third-quarter net income up 35% to $109 million, or $0.28 per share. Net sales increased 20% to $498 million, while same-store sales increased 21% (including an 11.7% increase in retail stores and a whopping 34% increase in factory stores). Coach's margins improved as well; the company beat analysts' third-quarter expectations and also said that it will beat expectations for the year, albeit by a modest amount. On the other hand, growth will be moderated in 2007 by higher share count brought on by stock option exercises and a higher tax rate -- with earnings up 20% and sales increasing by 19%.
According to the conference call, Coach's free cash flow decreased by 42% in the third quarter, because of increased capital expenditures -- something Fools don't particularly like to see -- although the company said free cash flow has increased year to date. (It's hard to take a closer look, because Coach didn't include a cash flow statement with its press release. Boo!) Coach's cash and equivalents increased 69%, and the company plans to use some of that to fund distribution growth (through initiatives like new stores and renovations), invest in infrastructure, and continue to buy back shares.
Japan is a bright spot for Coach; the company revealed that the market for its luxury products may be bigger than expected in that country. If Coach can cultivate customer loyalty for its accessible sophistication in Japan, as it has in the U.S., it goes without saying that Japan could be a powerful driver of Coach's business.
Like Tiffany (NYSE:TIF), Coach depends on customers' willingness to shell out for pricey wares. On the other hand, very much unlike Tiffany, Coach has successfully reached out to less affluent customers through its factory stores. So far, there seems to be little proof that this strategy has alienated Coach from its wealthier, full-priced clientele, or tarnished its brand. Coach's third quarter gave no indication that the retailer is losing its touch, although its capital expenditures do show that the company sees the need to up the ante on distribution of its wares.
Despite having been a historically strong and profitable performer, Coach seems to be making investors nervous with its cautious outlook for the future -- which, admittedly, still forecasts double-digit growth in sales and earnings. For the time being, it seems as though Coach still has things well in hand, and a nearly 8% drop in share price today might just be a point when opportunistic investors start thinking that high-end Coach is becoming a bit more of a bargain.
Take a trip down memory lane with Coach:
- Coach recently bagged another quarter.
- Last fall, one Fool called Coach to task.
- People have wondered at times whether Coach could keep up.
Alyce Lomax does not own shares of any of the companies mentioned.
