David Peltier
Shares of the luxury-handbag maker and retailer Coach(COH Quote - Cramer on COH - Stock Picks) have been on a roller-coaster ride over the past few months. At Wednesday's closing price of $29.98, the stock is up 29% from its January lows but still 45% off its 52-week high.
The company operates 282 retail stores and 99 factory outlets in North America, as well as 147 locations in Japan. Coach generated a record $2.61 billion in revenue in fiscal 2007 (ended June), about 25% of which was from its international markets. The stock took a hit Wednesday, when analyst Liz Dunn of Thomas Weisel downgraded her rating on Coach from overweight to market weight, citing slower growth expectations in handbag sales and a weaker pricing environment. But at current levels, the stock is trading at just 14.7 times expected fiscal 2008 earnings of $2.04 a share. This is below the company's 21% projected annual profit growth and a 48% discount to Coach's historical average valuation over the past decade. Given all this, what should you do? Should you buy shares in Coach now, wait a bit, or forget it altogether? My prime role here at TheStreet.com is to analyze value stocks like Coach, which I do regularly for TheStreet.com Value Investor service. (Check out a free trial.) Let's take a closer look at Coach. Coach posted solid fiscal second-quarter (ended December) results Jan. 23. The company earned 69 cents a share, which was a penny ahead of expectations. Revenue grew 21% year-over-year to $978 million, which was also $12.8 million higher than the consensus analyst estimate. But the strong holiday season sales did not come easy for Coach. Management said that North American same-store sales fell 1.1% year over year, as demand was hurt by weak mall traffic and an unexpected decline in average transaction price. This came about as customers shifted toward buying smaller ticket items, and Coach enticed shoppers with increased promotional activity. As a result, last quarter the company's gross margin fell 170 basis points from the previous year to 75.4%. Still, this is well ahead of the 53.3% gross margin posted by Polo Ralph Lauren(RL Quote - Cramer on RL - Stock Picks) in its most recent quarter. Despite the slower domestic sales, some value investors may be intrigued by the company's pristine balance sheet that has $874 million ($2.50 a share) of net cash. Management spent about $707 million to buy back more than 20 million shares during the most recent quarter, and Coach has $661 million remaining on its buyback authorization. While I believe that Coach holds value for long-term investors at current levels, readers should avoid the stock for the time being. Despite the recent short-term interest rate cuts and upcoming tax rebates, I believe that consumer spending will be flat to down in 2008. As a result, there is a downside risk to the company's near-term earnings expectations, which means that investors will likely have the chance to buy the stock in the mid-$20s later on in 2008. Coach is not included in TheStreet.com Value Investor model portfolio. David Peltier writes regularly about value stocks, such as American International Group(AIG Quote - Cramer on AIG - Stock Picks), Motorola(MOT Quote - Cramer on MOT - Stock Picks) and Pfizer(PFE Quote - Cramer on PFE - Stock Picks), for TheStreet.com.
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