Coach's (NYSE: COH) share price has been on a tear over the course of the last year, but it took a bit of a breather today. The handbag maker released second-quarter results that at least some investors found less than inspiring.
Second-quarter net income increased 25.7%, to $303 million, or $1.00 per share. Net sales increased 19%, to $1.26 billion. North American same-store sales surged by a strong 12.6%, and comps in China grew by a double-digit rate. Not surprisingly, CEO Lew Frankfort said China is Coach's fastest-growing business; more unexpectedly, Coach plans to move some production from China to places where production expenses are lower, like India and Vietnam.
Despite many signs of a solid quarter, some investors fretted about Coach's gross margin, which remained stagnant at 72.4% and missed analysts' expectations. Basically, shoppers spent a lot at Coach's lower-priced outlet stores, and the company marked down its average handbag price by 10%, dragging down margins. Given our still-flailing economy, none of this seems too surprising.
Despite any temporary pessimism, Coach remains a strong defensive stock. It has a classic brand that resonates with American consumers, and its merchandise is associated with high quality. Even in a difficult economic environment, Coach is the kind of quality splurge that consumers will be willing to save up for.
Meanwhile, Coach is a well-run company that could let investors sleep at night. There are plenty of beleaguered retail and consumer-facing companies out there, all of which are risky for investors. Take Talbots (NYSE: TLB), which recently reported more bad news on the sales and earnings front, or RadioShack (NYSE: RSH), whose shares recently plunged after it ditched its CEO and warned of a lackluster quarter ahead. Or what about Dillard's (NYSE: DDS), whose shares recently surged on decision to form a real estate investment trust, not the strength of its actual department-store operations?
Investors would be far better served investing in a company like Coach, which is strong enough to announce a new share buyback to the tune of $1.5 billion. Although its forward P/E of 16 may sound pricey compared to many beleaguered consumer-facing stocks, Coach can both survive and thrive, even as many other companies scramble for customers.
