I don't know what feels worse: the regret of not buying shares in a company I clearly should have recognized as a winner, or the regret felt from making a bad decision and buying a stock that's just all wrong. Both eat at you, and both make the self-flagellation and second-guessing in your head rise to screaming levels. (Or maybe it's just that I'm that neurotic.)
Regardless, today's exercise in self-loathing stems from a company I should have bought a couple of years ago. It was such an obvious thing. And it pains me that I somehow missed it.
The one that got away
Coach (NYSE:COH), the venerable fine handbags and accessories maker, is the company I'm pining for from the sidelines. It has staged a turnaround like you wouldn't believe in the last few years. Why, oh why, couldn't I have seen it coming?
My generous (and really cute) boyfriend gave me a Coach handbag for my birthday in October 2001, and I fell in love with the brand. I've purchased (and have been given -- thanks, honey!) more things from Coach after loving that initial gift so much.
I'm not the only one. The Coach store at my nearest mall is always buzzing with customers. The handbags and accessories are fresh and gorgeous, and are in high demand. Coach as it exists today is nearly unrecognizable as the brand I remembered from the 1980s and 1990s.
I should have realized that what I loved in the stores would probably translate into a company I would love in my portfolio. But for some reason (sloth? stupidity? delusion?), the thought didn't occur to me until recently.
Take a gander at this chart, so you, too, can share in the pain of what I could have had. Now don't rub it in. I can see as plain as you do that Coach is up 400% since the end of 2000, while the S&P... well, we all know what the S&P has done in the same time period, and it ain't pretty.
Heck, even if I had only bought at last year's low of $17.19, I'd have still enjoyed a rise to north of $50 a share.
Argh!
OK, breathing, breathing. Let's just move on.
What in the world is going on at Coach? What shopping mojo are the folks there mixing up? How is a luxury goods retailing company, with an average customer ticket of around $165, finding success in what has been a generally dim environment for retailers?
Coach's story
To get at that, we'll have to retrace some of Coach's history. The company's been around, churning out its leather goods, since 1941. Sara Lee (NYSE:SLE) (yes, I agree it seems a strange fit) bought Coach in 1985. It operated as a division of the larger company until 19.5% of it was spun off in October 2000. Sara Lee decided to divest the rest of its Coach ownership the following year, and the company fully became its own entity in April 2001.
Between 1985 and 1997, Coach's sales grew at a compounded annual rate of around 32%, from just $19 million to $540.4 million. Clearly, the company was doing something right through all that time. However, it stumbled in both 1998 and 1999, with small sales declines of 3.4% and 2.8%, respectively.
Ch-ch-ch-changes
The high-end accessories world was changing, with hot brands like Kate Spade stealing Coach's customers and market share. There was a fundamental shift, too, from all-leather goods being seen as the pinnacle of really nice handbags to all-fabric or mixed-material bags becoming more popular.
Coach was still viewed as the staid all-leather traditional handbag maker that it had been for its entire existence. It wasn't fun, or sexy. Its image was very conservative, and more than a little country club (not that there's anything wrong with that).
Recognizing that it needed to change to thrive, Coach started a vast remodeling effort for its U.S.-based retail stores, select department store locations, and some of its international locations. At the same time, it was furiously at work, updating its products to make them more relevant to today's customers.
When it first introduced its "Signature" line, even Coach may not have realized the runaway hit it had. The bags are a mixture of fabric and leather, and are covered in a "C" print. The print creates a feeling and look of exclusivity, similar to super-high-end prints from Louis Vuitton, Chanel, and Gucci (NYSE:GUC). Coach has expanded the line to great success, and now offers two versions (a small "C" print and a large "C" print) of the bags in every shape, color, and style you could imagine. Coach's leather products also got an overhaul, to make them newer and more desirable.
Couple these product improvements with the stores' fantastic new look (crisp white walls, lovely hardwood floors, clean lines) and you had all the makings of a winner.
Coach's magic
And what a winner it has been, even in the face of a dismal retail environment over the past several years. Coach has managed to keep its customers coming back, and is continuously pulling in new ones, as well. Shoppers may not be spending as much on clothes or other items, but they're still shelling out for luxurious accessories at Coach.
This has meant strong revenue growth. Coach's sales grew 12% from fiscal year 2000 to 2001 and 20% from fiscal year 2001 to 2002. In the first nine months of the current fiscal year, sales are up 32% over the prior period to $721.71 million. It isn't slacking on comparable-store sales growth, either. In its most recent quarter, overall comps increased 1.4%, while domestic comps improved 14.1%, and domestic comps from its retail stores shot up 25.5%.
Earnings have been even stronger. Net income grew 66% from 2000 to 2001 and 34% from 2001 to 2002. Through the first nine months of the current fiscal year, its earnings are 70.5% ahead of last year's net income in the same time frame. Free cash flow (excluding tax benefits from stock options) so far this fiscal year is more than double what it was last year.
Which, of course, is all to say, "Where was my head?" I can't explain it. It's a perfect example of a great investment staring you right in the face, but you just don't see it until much later.
Come back in two weeks, when I'll go over Coach's financials in more detail. I'll also talk about the company's future growth plans and the incredible margin expansion it's experienced over the last two years. Lastly, I'll give the reasons why I think Coach still has lots of room to grow, and why I just may shift from my browbeating to deciding it's not too late to hop aboard Coach's success story.
LouAnn Lofton owns no shares of any of the companies mentioned. The Motley Fool is investors writing for investors.
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