Don't purse your lips. High-end retail can still make you rich.
That's the story
has been pushing on Wall Street lately, and clearly some investors have been happy to indulge. Though the stock remains below pre-Sept. 11 levels, it has risen sharply in the last two weeks as the company broke from the retail pack by largely maintaining its earnings guidance.
"The biggest surprise for me over the last six weeks is that we are not surprised," CEO Lew Frankfort told the Goldman Sachs small-cap retail conference last week. "We are running exactly where we thought we'd be."
Considering the economic slowdown that was setting in nationwide even before September's atrocities, Coach's strength is surprising indeed. For the most part, the retailers that have held up since the attacks have been those such as
that sell basic goods to the masses. It stood to reason that sales of $300 handbags would suffer. But they haven't.
"We believe that relative to the world, we will have a strong holiday season," Frankfort said. If so, this stock -- growing solidly yet trading at a discount to its jet-setting peers -- will make many Christmases a little merrier this year, observers agree.
So why is Coach, which was spun off from Sara Lee and sold to the public in October 2000, scoring so big when rivals such as
are seeing business dry up? For one, the New York company has ambitions far beyond its headquarters.
Where Coach's Sales Come From
"The big story for Coach is Japan," Goldman analyst Margaret Mager said at the conference. The Japanese buy four times as many handbags and accessories as do profligate Americans. "Japanese girls just love bags," Mager notes. (Of the 16 companies Mager covers, Coach is the only one on the firm's recommended list. Goldman has had a banking relationship with the company.)
Coach, which in June established Coach Japan through a joint venture with the Sumitimo company, has 75 store locations in Japan, mostly in department stores and plans to open 15 more by June. Its same-store sales at locations geared toward Japanese consumers, which include locations in Asia outside of Japan and a duty-free shop in San Francisco, have posted double-digit growth for seven straight quarters. Since the terrorist attacks, its sales trends in Japan have been unchanged, Frankfort said.
The joint venture will allow the company to expand its business in Japan, where Coach's presence is still small compared with other handbag makers. "Coach has never targeted building a brand in Japan until this year, and that is exciting," says Allison Thacker, an analyst at RS Investment Management, whose RS Emerging Growth Fund owns Coach shares.
Taste of Leather
Stateside, meanwhile, sales haven't slowed as markedly as analysts feared. In its recently completed first quarter, Coach said U.S. comparable-store sales fell 1.9%, comprising a 3.7% drop at retail stores and a 0.6% decline at cut-price outlets. Those declines put Coach in much better shape than the rest of the specialty retail sector, whose so-called comps showed a roughly 7% decline.
And even with its U.S. business weakening, Coach hasn't taken as many lumps as its peers. Coach hasn't suffered any order cancellations from U.S. department stores, which account for roughly 11% of sales, the company said last month in its latest quarterly earnings report. Following Sept. 11, the industry was rife with reports of cancellations, particularly at pricey fashion outfits.
"I think they've done a great job at creating a lot of new excitement in the handbag industry," says Eileen Murphy, an analyst for fund management firm Berger Associates, which owns Coach shares. She notes the company has aggressively launched new handbag styles over the last year, at a rate of one a month. In addition, Coach bags, while not cheap, are more affordable than Gucci or Prada, allowing the company to better weather the economic downturn.
Since Sept. 11, the company has slighly reduced its 2002 earnings and sales guidance, although it was in range of Wall Street's expectations, according to Thomson Financial/First Call. It now expects sales of $675 million, down from earlier guidance of $695 million to $715 million. Coach now projects earnings in the range of $1.60 to $1.65 a share; the current consensus is $1.61.
Still, the stock trades at about 16 times next fiscal year's estimated earnings, while Coach is expected to show 18% annual earnings growth over five years. Rival Gucci, by contrast, trades at 27 times next fiscal year's estimate, although Wall Street expects it to grow at just 14% annually.
RS Investment's Thacker sums it up for both investors and consumers: "Coach is hot," she says.