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After Bagging a Solid Quarter, Is Coach Stock Still a Buy?

By Steve Symington - Apr 23, 2013 at 8:34PM

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Coach stock rose 11% after much-improved quarterly earnings today. Is the stock still a buy?

Back in February, I singled out luxury handbag maker Coach (TPR 5.96%) as one of three stocks any investor could love on Valentine's Day.

After all, I don't know many women who don't already love Coach's products, and they offer a fantastic alternative for guys who can't quite afford the more expensive diamond wares from the likes of Tiffany. Besides, Coach stock was still hurting after falling 16% as a result of posting its first earnings miss in 11 quarters.

Last quarter's perceived weakness
Sure enough, investors were worried that last quarter's weakness would carry forward, especially considering sales from Coach's core North American market fell by around 2% from the year-ago period. In addition, while Coach did see 40% year-over-year growth in China last quarter, it faced steep competition from rival Michael Kors, which, as fellow Fool Dan Caplinger pointed out a few days ago, is becoming especially popular not only in China but also in other key markets shared by both companies.

Even so, the stock was still paying a healthy 2.5% dividend two months ago, and its men's business continued to put up strong results as it appeared on track to grow sales by around 50% globally in fiscal 2013.

Coach Stock

Coach store in Nagoya, Japan. Image source: Wikimedia Commons. 

This quarter's strength
Shares of Coach are trading up around 11% this morning -- its latest earnings report did much to alleviate stock holders' fears of prolonged weakness.

For the quarter, overall North American sales increased 7% year over year to $792 million, helped by direct North American sales, which rose 8%, and comparable-store sales, which were up 1%.

International sales rose 6% to $382 million, predictably led by the China market, which maintained its 40% growth rate as comparable-store sales growth stayed in the double-digit range.

What's more, the men's business still remains firmly on track to achieve its 50% growth for the year, and Coach reassured skeptical investors that its new footwear lines have been well received by consumers. In addition, thanks to Coach's $928 million in cash and equivalents and no significant debt, management also announced it has reached an agreement to purchase its partner's 50% interest in Coach's businesses in the U.K. and Europe, which should provide another boost in earnings down the road.

On the bottom line, operating income rose 3% to $348 million, while operating margin fell to 29.3% from 30.4% as selling, general, and administrative expenses rose slightly to 44.8%. Why? Management says it was "primarily due to to the acquisition of retail businesses in Asia." Meanwhile, gross margin rose an encouraging 35 basis points to 74.1% for the quarter.

Finally, Coach offered a vote of confidence and rewarded stock holders for their patience by raising its annual dividend by one-eighth to $1.35 per share. With Coach stock trading hands at 15.5 times trailing earnings and 13.6 times forward estimates, that means investors who buy today will be able to collect a 2.4% yield.

In the end, these strengths come as little surprise considering my colleagues recently ranked Coach 11th in's list of the 25 Best Companies in America. Despite this morning's pop, then, I'm convinced Coach stock remains reasonably valued and a solid long-term buy.

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