Streetwise
Lauren Rudd
Sunday, August 16,
2009
Do Not Write Off All Retailers
Few will disagree that the performance of the equity markets,
despite the gains of the past several months, has been erratic, unpredictable
and at times just plain not fun. Daily fluctuations of 100 or more points by the
Dow Jones industrial average are all too common.
Even worse, there is no shortage of prognosticators willing
to tell anyone who will listen (the media generally tune them in with rapt
attention) just how much worse the future is likely to be. If all that
negativism has you wondering if Wall Street is the street you should be on,
maybe the following will help shine a bit of realistic light into that dark
abyss we call the future.
Begin by looking back in history to the 1970s. Investing back
then was a courageous feat when you consider that the Dow fell from 1,072 in
1973 to a low of 578 in December of 1974. That makes this bear market look sort
of puny.
So, do I believe we will see an ongoing uptrend in equity
prices despite what many are quick to refer to as merely a temporary rebound in
a bear market? Because I am running out of fetching ways to answer that
question, let me simply say that the answer is yes.
The stock market is subject to, or is a reflection of, the
cyclic nature of the economy. As a result, it also cycles through peaks and
troughs periodically. Simply put, that is the way of life on Wall Street.
So what should you do at this point in time? Again, the
answer is an easy one. Despite the rally of the past several months there are
still many bargains available in the shares of companies that have suffered at
the hands of analysts to whom the glass is always half empty.
A good example is Coach (COH), a company famous for its
leather hand bags. Here is a company that maintains its panache because many
women regard its products with a near religious fervor. Although Coach is
unquestionably a “high end” retailer that you would expect feel the brunt of the
recessionary pullback in consumer retail spending, the company has surprised it
critics with its resiliency and market strategy.
To the latter point, the company’s management recognized the
need for a new price point within its product line and took appropriate action
with a well planned and executed line of attack, as opposed to a series of panic
induced moves dictated by declining sales, bringing to market its Poppy line.
For its 2009 fiscal year ended June 27, net sales were $3.23
billion, up 2 percent from a year ago. Excluding unusual items, net income
totaled $622 million, or $1.91 per share, as compared earnings of $2.06 in 2008.
My earnings estimate from a year ago of $2.30 turned out to be a bit too
optimistic. Nonetheless, the shares are up 43 percent this year, closing
recently at $29.85.
This fiscal year the company plans to open about 20 new North
American retail stores, at least six North American factory outlets, and about
10 new locations in Japan. It is also accelerating store openings in China with
15 new locations. There are 30 international wholesale locations planned with an
enhanced strategy for Western Europe. Again, these actions speak to the
company’s planned and well executed growth strategy.
Coach also plans to bring to market its new Reed Krakoff
label, designated for launch in late 2010. The line will encompass a variety of
categories, including ready-to-wear, handbags, accessories, footwear and
jewelry. The concept is designed to engage a segment of the retail market that
heretofore has not been a buyer of the company’s products.
The intrinsic value of the shares using a discounted earnings
model, with a conservative earnings growth rate of 9 percent and a 15 percent
discount rate, is $35 per share. The more conservative free cash flow to the
firm model produces an intrinsic value of $45 per share.
My earnings estimate for fiscal 2009 is $2.08 per share and I
have a 12-month target price on the shares of $35 for an estimated gain of 17
percent. There is also a 1 percent dividend yield.
