We receive many different questions from members of our Inner Circle service looking for a good stock market investment. This luxury retailer is using its strong brand image to increase sales in Asia. However, increasing manufacturing costs could put a squeeze on profit margins.
Q: Dear Pat: What is your opinion of Coach Inc.? Thanks!
A: Coach Inc., (symbol COH on New York; www.coach.com) designs and sells a wide range of accessories for men and women, including handbags, belts, wallets, card cases, shoes, luggage and jewellery. The company designs these products, but they are made by third-party manufacturers, mainly in Asia.
Coach gets 87% of its sales by selling goods through three main channels: the Internet, catalogues, and its 723 company-owned retail stores and factory outlets in North America, Japan and China. The company gets the remaining 13% of its sales by selling goods in department stores, and by licensing its brand to makers of other products, such as sunglasses, watches and perfumes.
Stock market investment: Coach buys back $1 billion of its shares
In its 2011 fiscal year, which ended July 2, 2011, Coach earned $880.8 million. That’s up 19.8% from $734.9 million in fiscal 2010. The company spent $1.0 billion on share buybacks during the year. Because it had fewer shares outstanding, its earnings per share rose 25.3%, to $2.92 from $2.33.
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Sales rose 15.3%, to $4.2 billion from $3.6 billion. That’s partly because Coach launched several new, lower-priced products in response to the weak U.S. economy. As well, the company continues to see strong sales in China and other parts of Asia. However, the Japanese earthquake/tsunami cut Coach’s sales by $46 million, and cut its earnings per share by $0.06.
Stock market investment: Coach raises its dividend by 50%
Coach holds cash of $702.0 million, or $2.43 a share. Its long-term debt of $23.4 million is less than 1% of its market cap.
The company recently raised its quarterly dividend by 50.0%, to $0.225 a share from $0.15. The new annual rate of $0.90 yields 1.7%.
Coach continues to expand. In fiscal 2012, it plans to open 40 new stores in North America, 30 in China and 15 in Japan. As well, Coach recently announced new distribution agreements that should raise its sales in Brazil and Vietnam.
The stock hit a new all-time high of $69.20 on July 7, 2011, but dropped to $46 on August 19. It has since moved up to its current $51.79. Coach now trades at 15.3 times the $3.39 a share that it will probably earn in 2012.
Coach’s strong reputation should continue to help it increase sales in fast-growing overseas markets. However, fashion trends are fickle. As well, rising labour and raw-material costs could squeeze its profit margins.
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