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Coach, Inc. (COH): Is Luxury Retail Back in Favor?

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Coach, Inc. (NYSE:COH)Coach, Inc. (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, Inc. (NYSE:COH)? Coach is notorious for rallying nicely, only to see its stock tumble shortly thereafter.



Coach, Inc. (NYSE:COH)’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, Inc. (NYSE:COH) 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%.

What about other high-end retailers?

Ralph Lauren Corp (NYSE:RL) designs and distributes higher-end products, including men’s, women’s and children’s apparel, accessories, fragrances and home furnishings. The real benefit for Ralph Lauren Corp (NYSE:RL) investors is the fact that it has a robust international presence, namely in Asia. The company also intends to open about 60 stores in China by the end of fiscal 2015.

For fiscal 2013, the company expects net revenue to increase by 2%, lower than its previously guided range of 2% to 3%. However, the company now expects its operating margin to be better than previous guidance indicated, with growth in the range of 75 to 100 basis points, up from earlier guidance of 25 to 75 bps.

Fossil Inc (NASDAQ:FOSL) designs and distributes consumer fashion accessories, which include a line of men’s and women’s fashion watches and jewelry, handbags, leather goods, belts and sunglasses. Fossil Inc (NASDAQ:FOSL), much like both Coach, Inc. (NYSE:COH) and Ralph Lauren, has an impressive international presence, with stores in over 120 countries.

Fossil Inc (NASDAQ:FOSL) recently posted EPS of $5.39 per share, up 16.9% from last year’s earnings of $4.61 per share, but this still lagged management expectations of $5.42 to $5.45 per share. Fossil expects to have a solid 2013, with sales expected to increase 10% in the first quarter of 2013, and operating margins to be between 12.5% and 13.5% in the first quarter.

Tiffany & Co. (NYSE:TIF). is a jeweler that could be a takeover target. Like the other specialty and luxury retailers listed, Tiffany & Co. (NYSE:TIF) has a robust international presence, with half of its total sales generated internationally. This is part of the appeal that makes Tiffany and some of the other luxury retailers takeover candidates.

Gamco Investors’ CIO, Howard Ward, has also noted that “sooner or later someone will make a run at Tiffany & Co. (NYSE:TIF)…there are some obvious foreign luxury brand companies that would be interested.”

Bloomberg also reported back in January that Tiffany might be on the M&A radar. The most talked about potential acquirers include global luxury conglomerates, namely LVMH. The acquirer would get a strong American brand, while also being able to expand Tiffany & Co. (NYSE:TIF) in Asia and Europe. The same could be true for Coach.

Earlier this year, Bank of America Merrill Lynch’s quantitative analysts identified both Coach and Ralph Lauren Corp (NYSE:RL) as “attractive take-out candidates, given their relatively high free cash flow and manageable debt positions.”

Meanwhile, even without a buyout, it could be worth taking a look at Tiffany. The company expects EPS to increase 6%-9% in 2013 and forecasts total sales growth of 6%-8%.

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