Case Study: Coach

Coach (NYSE: COH) skyrocketed earlier this week after announcing better-than-expected earnings; the stock is now up nearly 10% over the past week. The accessory and handbag company managed to post fiscal 3Q earnings results of $0.84 per share, up from $0.77 a year ago, and beating consensus of $0.81.
Question is, is luxury retail back in favor, or is this another head fake by Coach? Coach is notorious for rallying nicely, only to see its stock tumble shortly thereafter.

Coach's recent performance could be a sign of things to come, especially on the back of a rebounding economy. The company plans to drive long-term growth with expansion of its global distribution model and tapping under-penetrated markets. Coach generated 32% of 2012 sales from outside the U.S., while also having a solid balance sheet with little debt. The retailer ended last quarter with cash of $858 million and total long-term debt of $23 million.
Management did take a cautious stance for the second half of fiscal 2013, expecting high single-digit sales growth, with flat North America comp sales. However, margins are expected to remain above the competition, with the full-year gross margin to come in at 73% and operating margin projected to be 31%
Executive summary * Coach’s stock price has jumped by more than 15% after the release of its latest quarterly earnings. * We estimate Coach’s total sales to grow at 6-7% over our forecast period led by rapid sales growth in China and other countries (except Japan) coupled with single-digit growth in North America. * Coach looks fully valued based on our expected growth rates for its key businesses. Coach’s profits are also estimated to decline in the short term on account of increased SG&A expenses due to the acquisition of distributor businesses in international markets.
New York-based Coach, founded in 1941, once dominated the U.S. handbag market and has been a go-to brand for women in the aspirational luxury segment. But it has lost some of its luster as its target audience defected to flashier labels from outfits such as Michael Kors KORS -1.37% Holdings Ltd., Kate Spade, owned by Fifth & Pacific Cos., FNP -0.40% and Tory Burch. Increasing competition from these and other brands in recent quarters has cut into Coach's growth, especially in North America compared with competitors

Industry Structure and Competitor Analysis Michal kors
After the slowdown in the U.S. economy, luxury goods and apparels sales were largely hit as discretionary spending diminished. Now entering times of recovery, the leading trademarks in the segment seem poised to grow again and expand to new markets. On this occasion, we will look into Michael Kors Holdings (NYSE: KORS), Urban Outfitters (NASDAQ: URBN), andCoach (NYSE: COH) in order to understand the main reasons behind the expectations of recuperation.

A stock with margin growth
First in our list is luxury brand Coach, a pretty interesting case. Although the stock had been down for a few months, it has been showing considerable signs of recovery in the past days. After the announcement of stronger-than-expected third quarter results on April 22, the stock was up by almost 10% within a day and continued to escalate. However, the stock still offers a relatively low P/E ratio, since it trades at 15.27 times P/E, less than half the ratio offered by its main competitor, Michael Kors, which trades at 31.35 times P/E. This stock looks even cheaper compared to its peers, when its forward P/E of 13.8 times and PEG ratio of 1.4 are taken into account.
Several reasons lead me to believe that Coach is a good long-term investment. Coach is an established fashion (mainly handbag and accessories) brand, ranked by Forbes as the 51st most powerful brand in 2012. Its fame for high-quality products that compete with Louis Vuittonor Chanel attracts an oncoming public, willing to pay a premium for the company´s creations. Expansion of its worldwide distribution

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