Coach, Inc. (NYSE:COH), the New York-based maker of handbags and other accessories, is back on track. The company reported better than expected quarterly earnings and raised its annual dividend by 13%. Investors cheered the news: Coach’s shares went up as much as 13% when earnings were finally released.
Results and strategy are on the right path.
The numbers were indeed surprising. Third quarter net income rose by more than 6%, total revenue for the quarter increased by 7%, international sales rose 6% (thanks to a 40% rise in Chinese sales), and same-store-sales in North America were up by 1%.
Besides (and most importantly), the company is making strategy changes in the right direction. Coach, Inc. (NYSE:COH) is in the process of repositioning itself as a “global lifestyle brand”, and hence expanding its product line from menswear to shoes. As a matter of fact, the company’s shoe business, launched less than two months ago, is growing so fast that now represents 12% of the company’s total turnover sales.
Coach looks relatively cheap!
You might think that those good results are “normal” for a correctly managed luxury goods company. After all, a younger company such as Michael Kors Holdings Ltd (NYSE:KORS) is expected to grow Year over Year (YoY) sales by more than 60% in 2013 (and quarter to quarter by an astonishing 20%). Even more exclusive brands such as Hong Kong-listed Prada is expected to increase sales by more than 20% YoY. That said, Coach is being valued by the market at a fraction of what those companies sell for.
Coach, Inc. (NYSE:COH)’s shares are even cheaper than Ralph Lauren Corp (NYSE:RL), which is growing sales at a slower pace than Coach, and has lower profitability levels. While Coach has a Return On Equity (ROE) of over 50%, Ralph Lauren has a ROE 30% lower, at around 20%. Besides, Coach is producing a Return On Invested Capital (ROIC) which more than doubles the one produced by Ralph Lauren (86% versus 28%). Of course, New York based Ralph Lauren Corp (NYSE:RL) is a much more established company, and its cash flows are less risky, but the price and profitability premiums more than reflect the cash flow stability theme.
To see how wide the valuation gap is, let’s take a look at a few multiples. While Coach, Inc. (NYSE:COH) trades at 2013 7.6 times EV/EBITDA and 13.5 P/E, Michael Kors Holdings Ltd (NYSE:KORS) sells for 2013 22 times P/E. Ralph Lauren sells for 2013 10.5 times EV/EBITDA and 21 P/E. A huge price difference. Dividends are also in favor of Coach, which is paying a 2.4% cash dividend yield. Kors pays no dividends at all, and Ralph Lauren Corp (NYSE:RL) pays you a 1% dividend yield.