Coach (NYSE: COH) reported solid quarterly results today, yet its share price has taken a hit. Investors should take a deep breath and hang on tight. In a world of flimsy knockoffs, this handbag maker just might be the genuine article.
Fiscal fourth-quarter net income increased 34% to $196 million, or $0.64 per share. Net sales surged 22% to $951 million. Coach increased gross margin in the quarter, reporting that in its first full year of direct operations of its stores in China, comps have increased by double digits.
On the negative side, Coach didn't beat analysts' expectations with its results. It also warned that higher costs will pressure its gross margin in the second half of its fiscal year.
Worse yet, a difficult economic environment could wreak particular havoc on the fortunes of luxury stocks. After earlier signs of a possible return to spendthrift ways, customers seem to have resumed pinching pennies, boding poorly for the promise of true recovery. Many previously promising results from retailers could simply have owed to easier comparisons against abysmal prior-year numbers.
Now, even affluent consumers are ratcheting back their spending. The Associated Press recently reported that the wealthiest 5% of Americans are buying less -- not a good sign, since they represent 14% of total spending. MasterCard's SpendingPulse said luxury expenditures dropped in June for the first time since last November.
Personally, I'd avoid many luxury-oriented retail and consumer goods stocks, such as Nordstrom (NYSE: JWN), Saks (NYSE: SKS), William-Sonoma (NYSE: WSM), lululemon (Nasdaq: LULU), or Abercrombie & Fitch (NYSE: ANF), right now. Amid high unemployment, perilous household debt, and a languishing housing market, American consumers just aren't healthy right now, and these negative factors won't right themselves for a while yet.
However, good investors know that there are exceptions to every rule. I'd argue that Coach is just such a standout among luxury stocks. It possesses a solid, venerated brand, and it has been proving its mettle in a tough economy. Coach recognized the potential difficulties early on, and it has worked hard to navigate that changing consumer landscape.
The handbag maker now trades at 15 times forward earnings. In comparison, lululemon looks downright scary trading at 29 times forward earnings, while Nordstrom may look cheaper at 12 times forward earnings. However, Coach's track record of gauging consumer sentiment and tweaking its products appropriately, coupled with its solid balance sheet, make it a better, safer stock idea than many others these days.
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