Many people were surprised to see the luxury goods market hold up so well during the Great Recession and the following paltry recovery. Perhaps this is a testament to the willingness of the ultra-rich to keep spending despite the economic conditions. Of course the market did take a hit, but the best firms still managed to grow despite the slowdown. It isn’t hard to find the best of breed in the luxury goods market. There aren’t many better-run firms than the one I am discussing today: Coach (COH).
Best of the Best
I was ready to go with this article earlier in the week, but then realized that Coach was set to report earnings. I didn’t want to look stupid by pushing the stock and then getting crushed after a poor report, but I should have gone with my instinct and wrote about it because the stock soared after an excellent report.
The company said that fiscal first-quarter results came in at 63 cents per share, above the estimate of 55 cents. Sales also rose 20% and beat estimates by a wide margin. “We’re feeling great about the holiday season given the current sales trends in both our full-price and factory channels,” said Michael Tucci, president of North American retail. I bet they are feeling even greater after a 10% pop in the stock price following the announcement.
How did they do this? Management deftly started selling lower-priced bags during the recession and made it up on volume. In a great sign, the company said that its average unit retail price of handbags rose a bit during the recent quarter. I think investors keyed in on this piece of information and got excited. The company is optimistic that the holiday season will be a strong one. I don’t blame them since they were able to post big sales even before the holidays.
Is it Still a Buy?
I think the shares should continue to be bought, even after the post-earnings bump. The stock is trading at about 16.5x next year’s estimates, which isn’t terribly cheap, but also not expensive for this company. I think analysts will be busy raising their estimates after this awesome quarter, which will bring down the price/earnings ratio. It sports an ROE of 46% and an operating margin of 32%, so a premium valuation is more than warranted. I would say that $65 for the stock over the next year is not out of the question.
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