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Michael Kors Holdings Ltd (KORS): Is Coach, Inc. (COH) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Coach, Inc. (NYSE:COH) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Coach, Inc. (NYSE:COH)

What we’re looking for
The graphs you’re about to see tell Coach, Inc. (NYSE:COH)’s story, and we’ll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Coach, Inc. (NYSE:COH)’s key statistics:

COH Total Return Price Chart

COH Total Return Price data by YCharts.

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 40.7% Pass
Improving profit margin 0.1% Pass
Free cash flow growth > Net income growth 28.9% vs. 40.8% Fail
Improving EPS 55.2% Pass
Stock growth (+ 15%) < EPS growth 51.3% vs.55.2% Pass

Source: YCharts. * Period begins at end of Q2 2010.

COH Return on Equity Chart

COH Return on Equity data by YCharts.

Passing Criteria 3-Year* Change Grade
Improving return on equity 12.5% Pass
Declining debt to equity (97.6%) Pass
Dividend growth > 25% 125% Pass
Free cash flow payout ratio < 50% 29% Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we’re going
Coach, Inc. (NYSE:COH) puts together a really strong performance today, missing out on a perfect score only because its net income grew faster than free cash flow during our tracked period. However, Coach’s free cash flow remains slightly higher than its net income on a nominal basis. Coach has a good chance to gain a perfect score the next time we look at it, but it’ll have to keep making similar progress in the year to come. Let’s dig a little deeper to see if Coach, Inc. (NYSE:COH) can keep up the pace.

Coach reported modest revenue growth in its latest quarter, but same-store sales fell by nearly 2% in the North American market, which is a big red flag for future gains should it persist into the second half. Fool contributor Rich Smith notes that Coach is losing its market share in the handbags segment, which grew more than 15% in the quarter across all industry players despite Coach’s decline. In addition, creative director Reed Krakoff’s imminent exit could be challenging for Coach, Inc. (NYSE:COH), since the company must rebrand itself to compete with upstart Michael Kors Holdings Ltd (NYSE:KORS).

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