At the Fool, we like to give investors the same information that the hot-shot professional money managers offer. In that spirit of leveling the playing field, we have dissected accessorizer Coach's
A fast-moving Coach
Coach has been growing its top and bottom lines rapidly and with remarkable consistency. I was impressed to learn that it recently completed its 22nd quarter of at least 20% sales growth and 30% earnings growth.
I was equally impressed to hear that management is firmly focused on the future, rather than the past. A company must continually look to improve its opportunities, and looking straight ahead is the best way to get it done.
What's pulling the wagon?
Coach has a powerful brand, and it claims to be the leader in its core North American market. Management doesn't see itself losing this position anytime soon, since there seems to be no signs of this category's growth slowing down. The company saw 20% growth in the first half of this calendar year and believes it can sustain that rate, given that, according to the numbers, women are buying more handbags on average these days than they did just two years ago.
Coach strives to offer innovative products that entice women to update their bag collection more often. It works, and I can attest to it: My wife has to have a large bag to cram all of her stuff into, a small one for quick-access items, and a variety of in-between sizes. Don't ask me what all of these are for -- I just know that Coach is on target when it says that women on average purchase several bags per year.
The company says it will continue to focus on North America and Japan, but it will also look to increase its brand in emerging markets. Yes, that's right, and it makes sense when you reflect on it. China's economy, for example, is red-hot, and incomes there are rising rapidly. It's also a huge market, so getting a foothold now seems logical.
Product innovation will also continue to be an area of importance. Frankfort said the company's recently introduced lifestyle brands -- Signature Stripe, Legacy, and Ergo -- have all been well received and will receive updates this year, including new styles, colors, and materials. Coach will also be introducing three new lifestyle platforms: Bleecker will be coming next month, Heritage Stripe will have its complete roll-out in February, and Soho will launch in April.
Coach has also been busy expanding its brand. While some of the new items seems a little silly, such as a $148 black stick umbrella, and dog leashes and collars selling for $78 each, the brand extensions are, by and large, doing very well. Last year, Coach began selling fragrances and jewelry, and jewelry is doing so well that Coach has expanded its offering. In fact, jewelry is expected to generate more than 3% of sales in full-price stores in North America for the upcoming holiday season. And based on my wife's comments, it looks as though I'll be doing my holiday-season and Valentine's Day shopping there.
One thing you won't see from Coach is a ton of acquisitions. Management denied a report that it's thinking about acquiring Burberry. The company is intent on organic growth, and management stressed that its focus is on opportunities solely for the Coach brand.
Stressed consumer? What stressed consumer?
In response to a question about the consumer-spending slowdown, Coach stated that its business is still doing very well. That's not a surprise to me. Economic factors such as higher gas and food prices, as well as higher subprime-mortgage payments, disproportionately affect lower-income consumers. Other luxury retailers, such as Saks
But even at its factory outlets, where it should be the most vulnerable, Coach continues to do well. As Frankfort stated, offering value and a broad and diversified assortment has helped. He also believes that when consumers tighten their budgets for their wardrobe, they migrate toward buying more accessories as an economical way to freshen up their look.
Margins, margins, margins!
Coach's operating margin was 38%, and it's looking to expand that number even further, despite a rising minimum wage and higher costs for health care and energy. Some of the company's plans here are simple, such as cheaper sourcing initiatives for raw goods. The balance of the plan involves leverage on sales, general, and administrative costs, including fixed expenses such as finance and design, and leverage in retail expenses as comps continue to grow. The company needs comps growth of 5% to 7% to see the benefit, and considering that it's been giving guidance of above 10% for factory outlets and full-price stores, it seems confident that it can make the mark.
A no-nonsense Coach
If it's all so easy, how come there aren't more serious competitors? Well, women are very loyal to their handbags. But even more than that, Coach keeps coming up with new products. Its design team must be very well qualified, because I can't recall a single design dud in the bunch. Yet that isn't surprising, since the company focuses on understanding its consumers and offering a diversified and broad product assortment that meets their criteria. All of that legwork, in turn, helps drive customer traffic.
Jump on the bandwagon
I came away from the Coach presentation impressed. But it would be hard not to when a management team is boasting -- and rightly so -- about its business. Coach is a focused company that knows what it does well, and keeps doing it.
My only concern is its valuation of 27 times trailing earnings, which isn't cheap. But then again, you have to pay up for quality.
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