Listening to the management team at Coach (COH) talk about the company’s business is an odd experience. This “fashion” company spends a lot of time talking about “engineering” its products and building production and distribution “infrastructure.” (Want to hear a sample of Coach-speak? Tune into the company’s presentation at the Morgan Stanley Global Consumer and Retail Conference here http://phx.corporate-ir.net/phoenix.zhtml?c=122587&p=irol-eventDetails&EventId=2532032 )
And that’s a major reason that I want to buy Coach shares in the current tough environment for luxury goods. Anybody can roll out a new product at a lower price point designed to appeal to value-conscious luxury-goods buyers (now there’s a phrase I never thought I’d write), but it takes a company like Coach to introduce the new $300 Poppy handbag lines and “engineer” gross margins higher at a lower selling price. For why you want some cost-cutting growth companies in your portfolio now see my post http://jubakpicks.com/2009/11/20/nervous-afraid-to-stay-in-but-scared-to-get-out-join-the-club-and-read-my-three-strategies-for-coping/ )
Here’s the story on the cost side: Thanks to increased sourcing from China, India and elsewhere in the world; stream-lined product design (the company took 6 months out of its normal schedule when it launched its new Waverly collection), and improved distribution (including a new Asian distribution center set to go operational in March 2010) the company reported a gross margin of better than 72% in the first quarter of fiscal 2010. (The company’s fiscal year begins in July so the fiscal first quarter of 2010 ran from July through September 2009.) And the company has told investors to expect gross margins to stay above 72% for the remainder of fiscal 2010. That’s up from earlier guidance of 70% to 72% for gross margins.
And here’s the story on the growth side: Coach has stabilized sales in the United States and Japan. Which should let the stock price gradually reflect the company’s huge sales opportunity in China. Coach projects that by 2013 China (including Hong Kong, Macao, and the mainland) will account for 20% of the global handbag and accessory market. That would be up from 8% today. By 2013 that global market will have growth to $28 billion. Sometime during that period to 2013 China will surpass Japan to become the second largest handbag and accessory market in the world. Right now Coach’s sales in China are growing at a double-digit rate. The company will add 15 stores in fiscal 2010 to the 30 it has already opened in China. There’s still a lot of opportunity in China: The company’s research estimates that 72% of U.S. consumers know the brand; in China the figure is just 8%.
As of November 20, I’m adding shares of Coach to Jubak’s Picks with a target price of $40 a share by October 2010.
Full disclosure: I own shares of Coach in my personal portfolio and I will buy more three days after this is posted.