Update Coach (COH)
Coach (COH) reported that its earnings for the June quarter matched Wall Street expectations at 43 cents a share.
That’s about the last good news for the fourth fiscal quarter that Coach had to announce, however. Coach certainly hasn’t escaped the collapse in retail sales–although it is weathering the downturn better than most.
For investors who can get past the bad news of this quarter, though, the stock remains a compelling way to profit from the increasing number of middle-class consumers in China. That’s why I put the stock in my book, The Jubak Picks, and why it stays in that portfolio.
Here’s more of the bad news for the recently concluded quarter.
Net income dropped to $145 million from $214 million in the June quarter of 2008. Revenue held up better but still fell about 1% to $778 million from $782 million in the 2008 period. Gross margin dropped to 70.4% from 75.9% in the June quarter of 2008, and operating margin tumbled to 28.2% from 35.9% in the June quarter of 2008. Comparable store sales in North America declined 6.8% in the quarter. Sales in Japan were flat on a constant currency basis.
The one bright spot was China–and that’s especially good news because Coach and investors are counting on that country for future sales and earnings growth. Comparable store sales climbed at a “douible-digit rate,” the company said. Whatever that means exactly, it was enough to make the company accelerate its planned store openings there. The company told investors that it now plans to open 15 new stores in China, most of those on the mainland instead of Hong Kong, in the 2010 fiscal year that ends in June 2010.
(Full disclosure: I own shares of Coach in my personal portfolio.)
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Hi Jim,
I was just in China in March and I noticed a phenomenon. When I got off the plane in Shanghai, I noticed everyone around me were carrying Gucci, LV, and Prada bags and shoes. I was pretty shocked by the amount of luxry flowing around until my cousin who lives there told me most of them were fake.
In your book you detailed the massive success COH had in Japan over taking Gucci and Prada in marketshare. However China may be a different beast, it is a country where intellectual property and trade mark rights means very little. I think COH has great management, but Chinese consumers are used to buying fake Gucci purses for 1/20th the retail price of real ones.
What I’d like to know is what’s the retail price of those real Pradas and what the street price of rh fake. I think that’s critical for figuring out how much of the market Coach will lose to the fakes. In NYC I can buy Gucci for about $40 a bag on the street below my office. Yet some people, including some people who can’t really afford it, continue to buy the “real” bags. The presence of cheap fakes doesn’t mean they get the whole market. Just think of them as another competitor with a low price and a big market share.
The real bags over there cost more than they do in the US. About least 20-30% more from what I can gather (not that I am an expert or payed too much attention). The fake ones are separated into grades like A, B, C, D etc. The best ones cost about 90 dollars or ~600RMB, while the lower grades cost significantly less.
I totally agree with your way of looking at it. After all even with the higher markup, Gucci, LV, Versace stores seems to be doing pretty well. There are enough high income consumers with enough disposable income to buy them to keep them open.
Why would the real bags cost more in China than they would in the US? …so the company keeps the same margins? Would the expenses be higher for a store in China? Or just because the market is there for them to charge a greater premium for the luxury good?
I think it mainly has to do with import taxes, for example an import car would usually cost 2x as much as it cost in the US.
The overall bias of the Chinese economy is to discourage consumption, especially consumption of imported goods. You can see that in everything from restrictions on import licenses to limits on ownership in joint ventures to import taxes. China certainly isn’t unique in this policy. Japan pursued a similar course for decades.