Coach Rides High as Retailers Struggle

BOSTON ( TheStreet) -- Luxury retailers may seem like the worst investments given the prevalence of tightwad consumers, but the opposite is true for some companies.

Last week's Best in Class made the bullish case for jewelry seller Tiffany & Co. ( TIF). The same for leather-ware seller Coach ( COH) follows. The investment theses are comparable: Emerging-market demand, specifically in Asia, will offset developed-nation stagnancy this year.

Although America's economic dominance is weakening, its cultural hegemony is squarely intact. American luxury brands have cache in emerging markets, confirmed by Coach's latest commentary. According to CEO Lew Frankfort, Coach's business in China is experiencing "rapid" growth and "trending about a year ahead of our originally articulated plan." The company, founded as a family-run workshop in New York during World War II, now expects $250 million of China sales in fiscal 2012.

While the U.S. and Europe are growing at a slower-than-average rate, the luxury-retail industry in emerging markets is explosive. Coach's demand in China, the world's most populous nation, stems from consumption-hungry upper and middle classes. Coach's expensive, but not inaccessible, products cater to both demographics.

According to the recent Bank of America ( BAC) and Capgemini World Wealth Report, Asia's tally of wealthy individuals is now equivalent to Europe's. Asia-Pacific's rich population has increased 26% since 2008, led by substantial gains of wealth in China, Hong Kong and India. And the cumulative wealth of Asia's wealthy individuals increased at a rate of 31% over the same period, the fastest of all regions.

The consumption trend is compelling. But add in international pressure on China to transform from an export-driven to a consumption-based economy and you have an overwhelming bullish case for U.S. luxury retailers in the region. Coach and Tiffany are top plays on the trend. And Asia-focused researchers, namely HSBC ( HBC), forecast major upside in the retailers' share prices as a result.

HSBC offers a price target of $60 for Tiffany, implying a 47% return, and a target of $50 for Coach, suggesting 35% of upside. Of researchers covering Coach, 14, or 67%, rate its stock "buy" and seven rank it "hold." None advise selling the shares. Barclays ( BCS) and Sterne, Agee & Leach also value the stock at $50, whereas Jefferies ( JEF) and JPMorgan ( JPM) expect it to advance 30%, to $48.

-- Reported by Jake Lynch in Boston.


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