Coach Inc.
Solomon's Select, by Mark Robertson, Managing Partner June 1st, 2006
Coach has virtually no debt, a financial strength rating of A and a quality rating of 84.7.
Coach (COH) — Tote Sweet. Specialty retailers are generally a pretty volatile bunch when it comes to stock price. Coach’s stock price stability is ranked at 35 versus an EPS Stability of 68. The earnings trend has been steadier than the price trend. If stock prices fluctuate, the stock prices of specialty retailers fluctuate more, in general. Be even more vigilant for buying and selling opportunities when dealing with companies with lower EPS Stability ratings.
Founded in 1941, Coach is a designer and marketer of high-quality, modern American classic accessories including handbags, business cases, outerwear and weekend and travel accessories. Purses and handbags account for over 60% of revenues. How many high-quality (read expensive) purses are enough? The mystery eludes most males of our species although the answer apparentlyhas something to do with shoes??
Growth
The sales growth forecast for COH is still quite strong at 17%. The historical sales growth for the last five years has been 29.5%. Actual sales growth for 2005 was 29.4%.
Value Line projects long-term sales growth at 19.5%. According to Morningstar: “Coach has chalked up average annual growth of 26% over the past five years, driven by new domestic stores as well as expansion into the Japanese market. While we don’t anticipate that historical growth rates willcontinue, we expect continued organic growth at a respectable pace over the next five years.”
Profitability
Margins are projected to reach 23.3% in 2006. Value Line projects that long-term net margins will achieve higher levels near 24.4%. COH’s average actual net margin for the trailing 7-year period is 13.1% with a high of 22.7% in 2005. Morningstar “expects margins to grow slightly over the next five years as the company continues to expand its top line.”
Coach (COH) — Profit Margin Track Record. Very few companies in the S&P 500 can point to a track record this solid when it comes to profitability. As Morningstar points out, this can’t continue forever and is destined to slow — but is still expected to expand slightly in the coming years.
Valuation
The industry average projected P/E is 17×. COH has a projected annual P/E ratio of 24×. At Morningstar’s fair value estimate of $38 (5/31/2006) they’ve used an implied “fair” P/E of 29x for Coach. S&P uses a “P/E of 29x for calendar 2006 estimates” and justifies a premium P/E (relative to specialty apparel retailers) reflecting their outlook for market share gains and greater profitability.
Expected Returns, Quality & Conclusions
Based on a price at the time of the study of $29.08, the projected annual return was 18.8%. The profitability trend is impressive and speaks volumes about Coach management. Coach has virtually no debt, a financial strength rating of A and a quality rating of 84.7. Might the price pullback from $37 to $29 be a shopping opportunity?
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.