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Coach: Money in the bag?
Stock Spotlight: Wall Street loves this handbag seller's fashion hits; but what if there's a miss?
January 24, 2005: 1:20 PM EST
By Parija Bhatnagar, CNN/Money staff writer
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NEW YORK (CNN/Money) - You're simply not cool if you still don't own a wallet, belt, watch, pet collar, handbag -- something, anything(!) -- that bears the logo COACH.

OK, maybe the Coach craze hasn't hit that level of consumer hysteria, yet, but it's getting close. While many marketers slashed prices over the holidays in a bid to attract wary consumers, Coach played it cool.

Despite stingy seasonal discounts, this purveyor of upscale accessories still bagged a whopping 29 percent jump in sales during the quarter that included the holiday shopping season.

Coach is more than just a "merry" Christmas story, however. Analysts credit the brand's burgeoning popularity to its success in creating a unique niche in the fashion market by offering "affordable luxury" to budget-conscious fashionistas.

In other words, style-obsessed shoppers can buy a high-quality, fashionable leather accessory at prices that won't break the bank. More importantly, Coach's ability to surprise consumers with fun, fresh designs has kept patrons coming back for more.

From Wall Street's perspective, Coach (Research) has become an investor's dream. The stock jumped nearly 50 percent in 2004.

More good news: Coach recently boosted its profit outlook for its fiscal second quarter, which ended in December, saying earnings should hit at least 67 cents a share, up 34 percent from a year ago. Coach is scheduled to report Tuesday.

But given Coach's run last year, the stock may be fully priced. If so, is it poised for a longer term retreat, or should investors use a pullback to jump aboard?

Coming out swinging

Fashion is a very fickle business. Company A with a hit product one minute can watch consumers jump to Company B's hot new brand quicker than you can say "sooo yesterday." That alone makes Coach's streak of quarterly sales growth every quarter since it went public in 2000 all the more impressive.

Many within the industry credit CEO Lew Frankfort with the company's merchandising and financial success thus far as well for making Coach among the most fashion-forward brands in the market today.

And though Coach's sales during the holiday quarter are typically much higher than other periods, it nevertheless has been able to log healthy revenue growth throughout the year.

Coach is not only capitalizing on its brand cachet in the United States (where it designs its merchandise and operates about 100 retail stores) either. Overseas sales are going strong, especially in the world's largest luxury goods market, Japan, which accounts for nearly a quarter of Coach revenue.

Profits don't look too shabby either. In fact, Coach has consistently grown earnings and beaten Wall Street's estimates for at least the past sixteen quarters, according to Thomson/First Call. And industry watchers say the earnings momentum should continue as long as Coach is able to get away with selling its merchandise at or near full price.

Sweeter after Sara Lee

Founded in 1941, Coach was owned by Sara Lee (Research) until 2000, when it was spun off as an independent publicly traded company.

Since its IPO, Coach is up a whopping 1270 percent (adjusted for two 2-for-1 stock splits). The stock had a banner year in 2004, outperforming both the broader market and its peers.

With the stock just 5 percent below its 52-week high, it seems Wall Street's grown accustomed to Coach's success -- and therein lies the challenge for the company. With the bar already set high, there's a risk that investors will expect it to constantly trounce expectations. Just sliding past goals won't do.

Investors made that abundantly clear after Coach raised its quarterly outlook earlier this month. Shares sold off as the results were apparently not enough to satisfy the heightened expectations already built into the stock.

Buckle your seatbelts...

Investors may prove unforgiving of even a small stumble in the near term, but so far, analysts are confident the company has what it takes to deliver the goods, and then some, for the long-haul.

According to Thomson/First Call, 14 analysts rate Coach a "buy" or "strong buy" while 4 have rated it a "hold."

The stock trades at a pricey 30 times current fiscal year's estimates of $1.84 a share -- a steep premium to its sector. But at the same time, earnings are expected to grow about 20 percent a year over the next few years, much faster than the expected 11 percent annual growth rate for the apparel and accessories category.

Analysts expect profits will further improve as Coach cuts costs, adds new products and expands domestically and in new international markets.

Sure, luxury goods makers such as Coach are susceptible to fashion risks and market downturns. But Coach has proven that it's a trendsetter with its ability to keep "wowing" the consumer.

They say you can never have too many bags or wallets. And as long as that's the case, Coach's stock should continue to be a chic investment.  Top of page


Coach Inc.
Sara Lee
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