This Coach Continues Its Winning Ways

 | Nov 10, 2011 | 2:30 PM EST  | Comments
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With Black Friday little more than two weeks away, I decided to take a sneak peek at handbag and accessory maker Coach (COH), which is expected to have a strong holiday season. Analysts see the stock tacking on another 15% to 20%, but will economic uncertainty stick investors with a lump of coal?

The handbag and accessory business has been one of the best performing sub-categories in retail. The $9 billion U.S. handbag market is estimated to have grown 10% in fiscal 2011, up from 2010's anemic 4% pace. Coach believes it has 20% of the more than $100 handbag market in the US. The Japanese market makes up 40% of the global luxury business, and Coach believes it has a 16% market share. Despite managing to squeeze 17% growth out of the domestic market, the U.S. and Japan are more mature markets and offer limited upside. (For example, in the most recent quarter, Japan only grew by 1%.)

Coach is looking to expand in emerging markets, such as China and Singapore, which the company estimates to be worth as much as $24 billion. Coach already has 66 locations in China and has plans to add 30 more. Management wants to sell $500 million worth of merchandise in China by 2014, up from $185 million in 2011. Coach's direct-to-consumer business saw a big boost from Singapore, which helped the company outperform the handbag market yet again.

Despite global economic uncertainty, Coach continues to report strong results. At the end of October, the company blew past Street estimates. For fiscal first-quarter 2012, Coach posted earnings per share of $0.73 vs. Street estimates of $0.63 on a 15% increase in sales. Operating income totaled $322 million, up 13%. Operating margin was 30.7% and gross profit rose 13% to $765 million. Same-store sales in the U.S. rose 9.2%, and China saw a double-digit increase.

On the most recent earnings conference call, management was confident in its ability to drive double-digit revenue and EPS growth given its increasing global expansion. Growth was so strong, even the over-$400-per-bag category contributed a greater percentage of sales, reversing a trend seen during the recession. The Coach Men's concept has just begun to pay dividends. Men's revenue doubled in 2011 to $200 million, and management believes the division can easily get to $300 million in the next few years.

Investors are excited about the upcoming holiday season since the company has extensive plans for new products. Just before Thanksgiving, the company said it would update its assortment of the Madison and Kristin bags, as well as offer a new drawstring tote for the Chelsea model. In addition, the company plans to offer an assortment of Apple (AAPL) iPad covers priced under $100.

With the holidays approaching, it's tough to bet against Coach. Although the stock saw some turbulence in August, the shares quickly recovered as the company posted strong October results. Because of Coach's smooth execution, I believe it deserves a multiple in excess of 20.

Coach's brand rises above any economic worries coming from Europe. If the company can keep the momentum going, the stock should easily surpass the mid-$70s and the full-year consensus forecast of $3.44 per share for 2012.

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