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Coach, Inc. (COH), Michael Kors Holdings Ltd (KORS): This Profitable Luxury Retailer Is Still Cheap

Coach, Inc. (NYSE:COH) has had quite a sluggish share-price performance since the beginning of the year, moving up by only 3.6%, much lower than the S&P 500’s return of 13.8%. Still, it is in the portfolios of many famous investors including Joel Greenblatt, Chuck Royce and Paul Tudor Jones. Let’s take a closer look at this luxury retailer to determine whether or not Coach, Inc. (NYSE:COH) is a good buy at its current trading price.

Coach, Inc. (NYSE:COH)

Coach, Inc. (NYSE:COH) experienced the highest growth in China

In the third quarter 2013, Coach, Inc. (NYSE:COH) experienced decent growth in both its top line and bottom line. Revenue increased from $1.18 billion in the first quarter last year to $1.19 billion this year, while the net income rose 6.2%, from $225 million to $238.9 million. Moreover, its EPS grew at a higher rate, at 9%, from $0.77 per share to $0.84 per share, thanks to the reduction in the number of total outstanding shares compared to the same period last year.

Coach, Inc. (NYSE:COH) seems to have a lot of growth in the most populated country in the world, China. Its total sales in China increased by as much as 40%, with double-digit growth in comparable-store sales. Coachexpected to generate around $425 million in revenue in China within this year. According to Red Luxury, Coach, Inc. (NYSE:COH)’s success in China was due to three main reasons. First, Coach positioned itself in the “accessible luxury market,” with its price 50%-75% lower than the top luxury brands. Thus, it could weather the economic downturn. Second, as a third of the luxury market in China was for men, Coach has grabbed the opportunity to execute the model of dual-gender sales, opening more men’s stores in China. Last but not least, the retailer has multi-channel distribution strategy. It not only sells its products through its retail stores, but also through factory outlets and department stores.

Michael Kors Holdings Ltd (NYSE:KORS) posts 150% growth in Epsilon Energy Limited (TSE:EPS) Michael Kors Holdings Ltd (NYSE:KORS),
Coach’s main competitor, grew significantly in the fourth quarter. Its sales increased by 59.1% to $577.4 million, from $362.9 million in the fourth quarter last year. Net income more than doubled, from $43.6 million, or $0.22 per share to more than $100 million, or $0.50 per share. For the full fiscal year 2013, its total revenue jumped 67.8% to $2.18 billion while its Epsilon Energy Limited (TSE:EPS) experienced a year-over-year growth of more than 150%, from $0.78 to $1.79.

What makes me interested in Michael Kors Holdings Ltd (NYSE:KORS) is its capability to grow in Europe. In the past three years, its retail net sales in Europe came in at $101.7 million with the comparable-store sales growth of 51.3%. In North America and Japan, Michael Kors Holdings Ltd (NYSE:KORS) also had double-digit comparable-store sales growth, of 39.6% and 14.7%, respectively. Indeed, Michael Kors Holdings Ltd (NYSE:KORS) has been doing quite well with its operation in Europe, with its marketing spending to build the brand, raising shoppers’ awareness. In the next few years,Michael Kors Holdings Ltd (NYSE:KORS) wanted to produce around $500 million in sales in more than 100 stores in Europe.

Both Coach and Michael Kors have managed to deliver a significantly high return on invested capital. In the past 12 months, Michael Kors generated as high as 52.11% in return on invested capital. Coach’s ROIC was a bit lower, at 50.34%. Their peer, Tiffany & Co. (NYSE:TIF), the premium jeweler, was the least profitable, delivering only 12.23% in its return on invested capital. Both Coach and Michael Kors’ ROIC are much higher than the average single-digit return of the retail industry, at around 8%-9%.