Coach, Inc. (COH): Three Reasons To Buy

Page 1 of 2

Coach, Inc. (NYSE:COH)Luxury brand Coach, Inc. (NYSE:COH) has had a tough time in the past few quarters. Its shares have been sliding downward while its competitors are known to be eating into its market share. What, then, makes this luxury brand tick?

Good numbers in the last quarter

It’s impressive to note that Coach, Inc. (NYSE:COH) managed to beat analyst estimates when most people were expecting weaker results in its last quarterly earnings report. The company’s performance in the last year has been dismal, with its share price falling from $75 in May 2012 to $46 in February. Nonetheless, at a time when most people had written Coach off in favor of its rivals, the company has managed to report superb growth, beating market estimates.

In the latest quarter, Coach’s sales increased from $1.1 billion in the year-ago period to to approximately $1.2 billion. Its net income was up 6.2% from last year to $239 million for the quarter. Earnings per diluted share increased by 10% to $0.84.

Sales growth was due to increased traffic and transactions during the holiday season, coupled with improvements in Coach’s online and mobile businesses. Other reasons include solid performance by Coach, Inc. (NYSE:COH)’s men’s business and footwear division, which was relaunched in its North American stores last quarter.

Right focus

Coach’s most important market is North America, which accounts for nearly two-thirds of its total sales. In its last quarter, however, Coach’s total sales in the region increased by a mere 7%. As compared to competitor Michael Kors Holdings Ltd (NYSE:KORS), Coach’s performance in the region is lackluster.

In its latest quarter, Michael Kors Holdings Ltd (NYSE:KORS) recorded a phenomenal 41% growth in comparable-store sales in North America, backed by a 75% year-on-year increase in the wholesale segment in the region. The company has increased its presence in the global-luxury market by using social media and participation in runway shows. If Michael Kors Holdings Ltd (NYSE:KORS) manages to achieve its long-term target for 20% to 25% growth in revenue, Coach’s market share may suffer.

Given the situation in North America, what is impressive about Coach, Inc. (NYSE:COH)’s business approach is its increased focus on key international markets, such as China. China, with its ever growing number of ultra millionaires (1.4 million households in 2011) is a haven for western luxury brands. As early as 2008, China accounted for 25% of the world’s luxury product sales. High demand coming from the Chinese market can offset Coach’s declines in North America.

In its recent quarter, Coach, Inc. (NYSE:COH)’s sales in China increased by as much as 40%. Continued growth is expected in the quarters to come. Coach is planning to increase its presence in China in the next quarter by adding seven new stores to its current total of 118 in the country.

Business policy

One of the things that sets Coach apart from its peers is the amount of money it returns to its shareholders. The company is known for its regular share buyback policy. Since 2005, the number of Coach’s outstanding shares has gone down by 107 million. This implies that each investor in Coach, Inc. (NYSE:COH) now receives a bigger chunk from its earnings per share.

Page 1 of 2