The Gains of Coach

Healthy earnings gains in the latest quarter, expectations of a relatively strong holiday season and double-digit sales in markets such as China have lifted Coach shares (ticker: COH) 55%, to 57, since Barron's predicted a year ago that the New York-based company's push into lower-priced products and foreign markets would pay big dividends ("Success Is Always in Style," Dec. 14, 2009). The stock surpassed its 2007 peak of 55 in late November, and some Wall Street analysts expect it to rally into the mid-60s as Coach's operating margins expand and quarterly results beat expectations.

Others say retail stocks have peaked ahead of the holiday season, but Coach is likely to sustain its momentum well beyond Christmas and year end. The company's expansion into China, where it operates 49 outlets, is continuing, and its more moderately priced Poppy line is selling well.
On the latest conference call in October, Coach CEO Lew Frankfort said China represents the company's "single largest geographic opportunity." Analysts note sales in China doubled to $100 million in fiscal 2010; Coach plans to open 30 new stores there in fiscal 2011.
Another promising growth driver is men's accessories, now just 3% to 4% of total sales. In the latest quarter Coach opened its first five stand-alone men's factory stores.
Some analysts have recently upped their earnings estimates, with the consensus looking for $2.85 a share for the fiscal year ending next June, and $3.23 in fiscal 2012. Coach earned $1.92 a share in fiscal 2009.
Despite a 9.8% unemployment rate and concerns about a sluggish global economic recovery, consumer discretionary stocks, especially those of high-end retailers such as Coach and Polo Ralph Lauren (RL), are surging. Consumers, especially well-heeled ones, are lining up to buy "affordable" aspirational goods such as a Coach's $398 Madison patent leather large Sophia satchel.