Listening to the management team at Coach (COH) talk about the company’s business is an odd experience. This “fashion” company spends a lot of time talking about “engineering” its products and building production and distribution “infrastructure.” (Want to hear a sample of Coach-speak? Tune into the company’s presentation at the Morgan Stanley Global Consumer and Retail Conference here http://phx.corporate-ir.net/phoenix.zhtml?c=122587&p=irol-eventDetails&EventId=2532032 )
And that’s a major reason that I want to buy Coach shares in the current tough environment for luxury goods. Anybody can roll out a new product at a lower price point designed to appeal to value-conscious luxury-goods buyers (now there’s a phrase I never thought I’d write), but it takes a company like Coach to introduce the new $300 Poppy handbag lines and “engineer” gross margins higher at a lower selling price. For why you want some cost-cutting growth companies in your portfolio now see my post https://jubakpicks.com/2009/11/20/nervous-afraid-to-stay-in-but-scared-to-get-out-join-the-club-and-read-my-three-strategies-for-coping/ )
Here’s the story on the cost side: Thanks to increased sourcing from China, India and elsewhere in the world; stream-lined product design (the company took 6 months out of its normal schedule when it launched its new Waverly collection), and improved distribution (including a new Asian distribution center set to go operational in March 2010) the company reported a gross margin of better than 72% in the first quarter of fiscal 2010. (The company’s fiscal year begins in July so the fiscal first quarter of 2010 ran from July through September 2009.) And the company has told investors to expect gross margins to stay above 72% for the remainder of fiscal 2010. That’s up from earlier guidance of 70% to 72% for gross margins.
And here’s the story on the growth side: Coach has stabilized sales in the United States and Japan. Which should let the stock price gradually reflect the company’s huge sales opportunity in China. Coach projects that by 2013 China (including Hong Kong, Macao, and the mainland) will account for 20% of the global handbag and accessory market. That would be up from 8% today. By 2013 that global market will have growth to $28 billion. Sometime during that period to 2013 China will surpass Japan to become the second largest handbag and accessory market in the world. Right now Coach’s sales in China are growing at a double-digit rate. The company will add 15 stores in fiscal 2010 to the 30 it has already opened in China. There’s still a lot of opportunity in China: The company’s research estimates that 72% of U.S. consumers know the brand; in China the figure is just 8%.
As of November 20, I’m adding shares of Coach to Jubak’s Picks with a target price of $40 a share by October 2010.
Full disclosure: I own shares of Coach in my personal portfolio and I will buy more three days after this is posted.
Jim, first, you’re great. I believe strongly in what you have to say and your advice has save me some $ long before the October crash. I have been watching Coach for some time and have been aware of this growth potential since July 2008. However, I can’t buy into a stock like this that exploits animals for our personal vanity. Especially, if manufacturing kicks off in China where they are know to use dog and cat skins for leather. To me this is a sin stock, like the tobacco companies are to others. I look at the bins of tossed off purses at Macy’s an other shops and see dead animals. And all for what? The latest fashion statement. Sure, this is a money opportunity, but at what price? I not a Peta member ranting on a soapbox, I adore animals and this is just my opinion especially when we live in a time where we can manufacture leather like materials without killing a living being for being in fashion.
wfrank1999 – yes, thats true. but thats true for many other stocks as well. Stocks doubled and tripled between March and August. Interesting point would be to see how they did after August when the reaction to oversell in March subsided and other factors started pushing them up (or down). By that measure, COH only appreciated 10%.
My friends still like their bags and she is in her late 20s I realize they didn’t really lower their prices, which I think is great sign, because they don’t have to lower price to attract customers and in return, they don’t need to lower their brand image and let customer get use to the 50% discount because other company poor managment on stock. The counterfit is serious in China or be honest in a lot of Asian countries, but the thing is a lot of people can actually tell the different between a real one and a counterfit and others might look down on you when you do. So if they have enough cash, which they do, they will still try to get the real one. I would be more upset if they lower their prices and take the short-term profit and tradeoff for their long term brand image.
I am nervous about this pick. The stock is up 200% since march.
My wife used to love Coach. She has their purses and wants to buy more.
We’re in our early 40’s and Coach has veered toward the 60-year-old ugly purse demographic quite noticeably in the last couple years. There is literally nothing they have that my wife wants to buy any more, and I agree with her. We walk into a Coach store desperately wanting to find something she likes, but we’ve given up. Nothing but gaudy old lady purses these days.
Maybe the move makes sense – gear yourself to an older crowd with more money than the fashion-conscious 30-50 year-olds.
I mentioned the popularity of counterfit bags in China in your previous post. But I think this is still a good buy, the market in China is so huge theres plenty of money for real luxury bags.
Darn you, Jim Jubak. You just had to mention the Waverly collection. I went to coach.com to see what that was. So now I am longing for a $200 wallet to go along with the $358 handbag I had been coveting. I’ll forgo both purchases though and buy some shares of Coach so maybe I can afford these things in my retirement.