Stock of the Week
NYSE Symbol: COH
Price as of 3/15: $50.41
Beware of the Ides of March. It took until March 15th for the major averages to post a decline on a Friday for 2013. Similar to 2012, the major averages have marched straight up to start the year. All the major averages are performing well this year. Consumer Discretionary or retail has been on a tear the last couple years. The sector was supposed to get hit this year with the repeal of the 2% payroll tax. So far nothing has slowed this sector or the markets. It's getting tougher to find stocks that haven't participated in the rally as of yet, but this week we'll highlight a highflying retailer that has come down to earth. The stock of the week is Coach. Coach is a leading U.S. marketer of premium handbag and accessories. The company sells products globally through both direct and indirect channels by building a business model that emphasizes "accessible luxury" products while also reaching a larger demographic than many of its higher-priced competitors. On the charts, Coach's stock is looking better after building a base. A couple analysts have recently warmed up the stock with $56 & $58 price targets. CNBC's Cramer is also recommending the stock once again. In the short term, the company is working through an cycle lull, but longer term the growth prospects are bright for Coach with a valuation a third of its' competitors like Tiffany, Michael Kors, and Ralph Lauren. A dividend yield of 2.5%, better than the S&P 500, provides investors with good income while the company looks to return to growth.
Coach has over 350 retail stores in the USA with prospects to bring the number up to 500 over the next several years. They also have 90+ stores in Japan as well as stores in China. The company has two main future growth prospects to drive sales: Men's products and China.
Much of Coach's recent sales growth came from overseas, especially from China. In 2012, sales in China increased more than 40% year over year and the trend continued as consistent double-digit comparable sales growth helped the region post 40% sales increases in the first two quarters of 2013. Sales growth in China will also benefit margins due to estimated 40% - 70% higher premiums paid by Chinese consumers. With rising incomes and higher standards of living, Chinese consumers are becoming more capable to fulfill their desire to enhance social status by association with famous western brand names. And as an "accessible luxury" brand, Coach is able to capture a bigger portion of China's expanding middle and upper class than its higher-priced competitors. Well aware of this opportunity, management plans to increase net square footage in China by 35% in 2013.
In Japan, management expects to increase square footage by 10% in 2013. As the expansion in men's business starts to take root, Coach could see flat or even modest growth in Japan sales for the next two quarters. However, the massive depreciation of the yen against the U.S. dollar since the beginning of 2013 will have an estimated 7% negative impact on Japan sales when translated to U.S. dollars.
In both U.S. and Asia, Coach is seeking more growth in men's business. According to Bain & Company, men's apparel in the worldwide luxury market grew an estimated 10% in 2012, surpassing the 9% growth in women's apparel. As gains in market share become incrementally more difficult in women's business, it makes strategic sense for Coach to expand into men's. During the first two quarters of 2013, the company has added seven men's factory stores in North America, and most of the new store openings in Japan during this fiscal year are expected to be men's. Coach's men's business is estimated to grow 50% globally to over $600 million in 2013.
Currently Coach's stock is trading for less than 12x forward earnings, a discount to its five-year average 15.3 and a discount to its' peers. The balance sheet remains strong with $800 million in net cash on the books. The cash flow remains strong with a dividend payout of 30% to support future dividend growth. With the recent pullback, the dividend yield is up to 2.5%, one of the best yields in the retail sector. Investors looking for an attractively priced stock in the retail space may want to take a look at Coach.