Streetwise

Lauren Rudd

Sunday, August 21, 2011

The Richness of Coach

Despite all the doom and gloom surrounding both the economy and stock market of late, there are companies that will manage to push ahead despite a less than an ideal economic environment. One good example is Coach, (COH), a company famous for its leather hand bags and one that I have talked about several times in the past. In addition, companies such as Coach, right or wrong, cater heavily to the wealthier part of society, those that are less prone to feel the effects of an economic downturn.

Moreover, Coach is able to maintain its panache because many women regard its products with a near religious fervor. Furthermore, Coach’s sustained focus on store sales productivity, merchandising, marketing and strategic pricing has helped it remain afloat in a difficult consumer environment as well as drive comparable-store sales higher. As a result, Coach continues to surprise critics with its superb market strategy and resultant earnings.

For example, the company’s management recognized the need for new price points 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.

When I last talked about the company a year ago, the shares were selling for $37.24. My earnings estimate for fiscal 2011 was $2.08 per share with a 12-month target price on the shares of $35 for an estimated gain back then of 17 percent. So how did the stock perform? The shares recently closed at $54.78, while earnings for the year came in at $2.92 per share, thereby netting a one-year capital gain on the shares of 47 percent.

For its fiscal fourth-quarter ended July 2, net income increased 18 percent to $202 million resulting in an increase in earnings per share of 22 percent to $0.68 per share. Sales for the quarter were $1.03 billion, an increase of 17 percent over the same period a year ago.

For the full fiscal year, excluding the 53rd week in fiscal 2010, net sales rose 18 percent to $4.16 billion and net income increased 24 percent to $881 million versus the prior fiscal year. In addition, earnings per share increased 30 percent to $2.92.

The company pointed out that results for the fourth quarter and fiscal year ended July 2, 2011 included 13 and 52 weeks, respectively, while the same periods in fiscal 2010 included 14 and 53 weeks. On a reported basis that includes the calendar differences, sales rose 15 percent, while net income was up 20 percent and earnings per share increased 26 percent from fiscal 2010.

For the full year, Coach reported operating income of $1.30 billion, a result that was 14 percent above the $1.15 billion reported in the year ago period, although the company’s operating margin was 31.4 percent as compared to 31.9 percent the prior year. Gross profit for the year increased 15 percent to $3.02 billion.

However, gross margin slipped a bit, coming in at 72.7 percent, as compared to 73.0 percent a year ago. Sales, general and administrative expenses, as a percentage of net sales, totaled 41.3 percent, as compared to 41.1 percent in fiscal 2010.

Coach has repurchased about 6.3 million shares of its common stock at an average cost of $60.08, spending a total of $381 million. Approximately $962 million remain available for additional purchases.

Coach maintains a healthy balance sheet with a significant cash balance and negligible debt load, ending the fourth quarter with cash and cash equivalents of $702 million and total long-term debt of $24.2 million. This strong liquidity position will likely help drive future growth. Shareholder equity at the end of the quarter was $1,612.6 million.

The intrinsic value of the shares using a discounted earnings model, with a conservative earnings growth rate of 14.8 percent and a 15 percent discount rate, is $82 per share. The more conservative free cash flow to the firm model produces an intrinsic value of $78 per share.