Coach may be late to China though plenty of benefits still ahead
Luxury and quality product companies and their stocks are often misconstrued for being extremely volatile. Sometimes they are but this is often due to a lack of brand identity. Some sector companies stay strong, almost regardless of the economic climate. This is largely due to the resilience of their brands. Companies with strong brand names are also benefitting from continued emerging market expansion.
One such strong brand is Coach, Inc. (NYSE:COH), an extremely popular brand in the US and Japan with a 36 percent and 17 percent market share in the premium handbag markets there respectively. Apart from market share the company's financials are pristine. Although many investors tend to decry past financial performance, as simply that, it can often show strong branding, management and economic advantages. Chart 1 demonstrates how stable Coach's revenue has been given that it is a luxury brand.
Coach's CEO has been at his post since 1995, and saw the company's spinoff from Sara Lee in 2000, which resulted in EPS growth at an average of 32 percent since then. Almost the entirety of its growth comes from the US and Japan, making its achievements much more impressive given that other luxury companies have become more dependent on emerging markets during these tough economic times in order to sustain growth. At the same time Coach managed to improve its gross and profit margin by 13 percent on the back of its strong brand by following a disciplined growth path.
History is good but what about the future?
Coach has seen a bit of a slowdown in the last couple of years, with sales growth at around 13 percent and EPS growth of 21 percent - growth rates that most companies would kill for. But Coach still has a trick up its sleeve. The company has very little presence in China with only 6 percent of its sales coming from there, which means Coach has a massive, unpenetrated market to grow into. For some this is a glass-half-empty story, where the company is seen as having simply missed its chance, but as I see it and as Coach sees it this is a glass-half-full opportunity, as China represents a massive market to conquer and there are plenty of benefits still ahead.
The company has now launched an aggressive campaign in China which started in 2010 after acquiring distribution and manufacturing companies in the region. The company expects that China should account for 20 percent of the company's revenues in three to five years, compared to the current 6 percent. Based on my own estimates, the company's expansion into China should contribute 15 percent of sales growth over three years versus its 2012 revenue. This is simply impressive given that the company currently only earns about USD 300 million in revenue from China (out of USD 4.8 billion in total). You can also add to this a further 40 percent growth internationally (excl. Japan) that the company has earned from its other foreign markets. It therefore appears that the sky is truly the limit for Coach.
So how much does this little darling cost? The company's stock took a 16 percent hit from Q4 earnings last week because of its disappointing same stores sales of 2 percent in the US, but has since rebounded to cut this drop by half. Nevertheless, the company is trading at a trailing P/E of around 16, and as a personal rule, any company that constantly grows at a percentage that is higher than its P/E to earnings ratio, is always worth a look.
So in investing in Coach it appears you can expect steady growth, excellent management and great potential at a good price. What more could an investor ask for? It might be a boring investment for thrill seekers, but could be great for wise investors.