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JohnCLeven (30.58)

What is your opinion on Coach, Inc.(COH)?



January 23, 2013 – Comments (12) | RELATED TICKERS: TPR , KORS

Greetings my fellow Fools, 

I would greatly appreciate your opinion on Coach (COH), which dropped about 15% today.

I am a Coach shareholder, and of the opinion that they are a pretty soild investment at today's prices. However, despite being 23 years old, i've only been studying investing for a mere two years. Therefore, when it comes to investing, I am the equivalent of a toddler that has just learned to walk, and has a vocabulary of about 15 words. And that is why I would love to hear what you, more developed Fools, have to say.

First, here are some points about Coach's last 10 years (2003-2012) that get me really excited.

FYI: Most of the data below was pulled from Morningstar here:

1. Coach has consistently maintained a profitability that is almost hard to comprehend:

-Over the past decade, Coach was consistently among the top 1 or 2% most profitable companies in capitalism. During the past decade, COH’s WORST annual return on equity was 38.8% for 2009. The ten year average is 46.1%. In fact 2012 was COH’s BEST year in that category at a 57.63% ROE.

-COH’s return on capital was nearly identical with ROE due to the lack of debt/leverage the company employed. ROC averaged 45.2% compared to ROE averaging 46.1%.

This is for a company that, over the past decade hasn’t had a debt/equity ratio over 0.02. They generally have had either zero or almost zero debt.

-Value Line does a screen across all stocks they cover (About 2600 stocks) called “High Returns on Earned on Total Capital.” The criterion is: “Stocks with high average returns on capital in last 5 years ranked by earnings retained to common equity.” Coach, Inc. ranked #24 on this list (just above Mastercard and below Accenture) with an average of 48% returned on capital and 42% being the average retained to common equity. Placing 24th out of 2600 suggests that COH has been among the top 1% of companies in terms of profitability.

-Free cash flow as a % of shares has averaged over 20% over the past 10 years.

-Sales per square foot for Coach is #3 in the world behind Apple and Tiffany. See below:

2.Growth has been consistent and wonderful:

-Earnings has increased EPS 9 out of the past 10 years (2009 being the down year with a 12% drop during the crisis) COH’s 10 yr average EPS growth rate is 30%.

-Free cash flows have grown at the 10 year annualized rate of 22.62% and a 5 year annualized rate of 10.2%, and that’s including the financial crisis.

3. Coach has successful, tenured, shareholder friendly management.

-Lew Frankfort has been at the helm for 18 years. He started running the ship in 1995 - five years before COH’s 2000 spinoff from Sara Lee. He’s done a brilliant job since, as my previous data has clearly shown. The stock has been a 25-bagger since 2003. That’s pretty nice.

-Since 2008, the company has bought back 18.8% of its outstanding shares, at an annualized rate of 4.1% annually since 2008. They also have a dividend yielding only about 1.9% but that dividend has been growing fast, doubling since 2010.

4. Valuation seems attractive for such a consistently impressive business

-14.2x TTM EPS

-15x TTM Free cash flow per share

Now comes the bad news:

The bear case is that Michael Kors and others, are wearing down the "Moat" that Coach has enjoyed for the past decade and that the past years of epic growth and profitability are over. While this may be true, to a point, I find it hard to believe that it could happen so quickly, after so many years of consistent dominance. Castles arn't typically built in a day, nor are they destroyed in a day.

My (potentially false) assumption:

Even IF COH's days of dominance are "over the hill", I don't believe that COH will drop from ROE over 40% for 10 years to 10% just like that. (Right?) Growth wont avereage 30% for a deacde and then just stop completely in one year. (Right?) I picture Coach like a freight train, and even if it has had the brakes applied, it will still be a gradual reduction in dominance over many years. Over that time, the company will still do above average for quite a while and do well for shareholders.

Even if ROE and EPS growth are cut in HALF by Michael Kors and others, Coach is still an attractive investment, in my opinion. That's why I increased my current COH position 66% today.

Now, the fun part:

I need to YOU to tell me whether you think i'm an idiot or not.

I'd really appreciate hearing what ya'll think of COH as an investment.


12 Comments – Post Your Own

#1) On January 24, 2013 at 12:14 AM, constructive (99.97) wrote:

I'm on board with the numbers above - although slowing, it still seems to be a great business. If you are patient I think you'll earn a good return.

My only problem is I don't like the fashion. Coach has always seemed a little boring/frumpy to me. (It may be that Coach bags are one of the few areas of fashion where women don't worry about whether men like it.)

There seem to be quite a few fashion companies on sale right now. Skullcandy trades at 6.7x earnings, Body Central 8.5x, Gordmans 9x, Crox 9.4x, Deckers 9.5x, Express 11.5x, Jos. A. Bank 13.2x, The Buckle 13.5x, Vera Bradley 15x, etc. 

I think I'll take a page from your book and buy more Apple tomorrow. Into the crevasse.

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#2) On January 24, 2013 at 12:38 AM, portefeuille (98.90) wrote:

Some luxury good company charts are here.

a nice long rally ...

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#3) On January 24, 2013 at 1:47 AM, DrGoldin (99.24) wrote:

Two numbers I actually liked from today's call were that gross margins remained steady at 72%, and sales in China increased by 40%.  That doesn't sound like a stock that should drop 16% in one day.

I do agree with MegaShort's comment that Coach doesn't represent the trendiest styles anymore though.

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#4) On January 24, 2013 at 9:01 AM, elcid24 (46.91) wrote:

For what it's worth, here are a few nuggets I've been pondering about Coach:

Retail investors love year over year comp store sales.  I know this sounds a little cliche, but Coach might be a victim of it's 2011 success.  

Coach management said that retailers caught them off guard with their crazy promotions this year.  They weren't really prepared for the mark downs and didn't do anything to try to compete.  And comp store sales only fell 2% in North America.  I think that speaks to the strength of the brand.  

I went with my girlfriend to get a Coach bag in November.  About 2 weeks later, the store manager wrote me a hand-written letter thanking me for the purchase, and remembered both of our names.  I was impressed with the service.

Coach might not be the trendiest brand, but I think it's the brand that people trust to always be fairly popular.  And people like their new stuff.  I read something yesterday that suggested 71% of sales this past year came frome newly introduced products.  Sounds like people like their latest additions...

I love getting good companies after a 15% haircut, but I was already in COH at an average price of about $54, and it's one of my larger positions.  I probably won't add anymore unless it dips a bit more.  Maybe my next buy-in price will be at a 2.5% yield.

#1 - you left ARO, TRLG, KSS, WINA, and TLYS off your list.  And EXPR looked much better when it was trading at about 6.5x, although it's still too cheap compared to GPS and AEO.

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#5) On January 24, 2013 at 9:24 AM, JohnCLeven (30.58) wrote:

Great feedback guys!

I was not expecting the consensus to be quite this positive.

My top 3 holdings are BRK.B, MCD, and COH. COH is the only one that makes me a tad nervous.


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#6) On January 24, 2013 at 9:26 AM, JohnCLeven (30.58) wrote:

Also, #1 and #4, thanks for the additional picks.

TRLG, KSS, ARO, JOSB, and BKE are all on my radar, and i'm glad to hear i'm not the only one interested by them.

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#7) On January 24, 2013 at 6:04 PM, ElCid16 (93.40) wrote:

speaking of Express... 


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#8) On January 28, 2013 at 8:07 PM, JohnCLeven (30.58) wrote:

typo alert: COH's FCF as a % of SALEs, not SHARES (that dosen't make sense) has been pretty consisently around 20%, about double the leven considered a "cash king.



Are you interested in JOSB after today's 15% drop?

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#9) On January 29, 2013 at 11:53 PM, shamapant (< 20) wrote:

I'm a bit more bearish. take a look at Tempurpedic...same kind of situation--great financials, great stock for shareholders for a long time, but it started to feel the effects of competition so it crashed...of course COH is much cheaper than TPX(TPX fell to roughly where COH is now), but I think COH is fairly valued. Why? with both stocks, they were running on brand advantage. A competitive advantage is present when you get more than $1 of value for a $1 spent building that advantage, and that was the case with Coach and TempurPedic where their brands became worth more than a linear model would suggest. However, I think they're reverting to the mean and will have to compete like any other company now. That means a drag on financials, and a lower multiple is deserved. I don't think this means short COH or anything, I just think you have to realize that COH is in a much more difficult position in terms of value creation as it's now moving back to equal terms with other fashion brands. ALSO, a lot of the things I hear about Coach's strategy is to TRANSFORM and CHANGE the brand. While there is a potential for success here, there is also a potential for risk, and you can't trust the past financials if the company is trying to do a makeover of the company's brand in the future. It's like a turnaround except management has enough foresight to do it when COH is in a very comfortable financial position...

 I guess that's enough of my COH rant today. I honestly haven't valued the stock yet, but I have been looking at it and I don't LOVE what I see. It's not extraordinary anymore, that's for sure. 

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#10) On January 29, 2013 at 11:55 PM, shamapant (< 20) wrote:

On the other hand, just saw elcid24's comments, and there still might be a competitive advantage...but you have to know the brand well enough to confidently identify it. That's what the thesis hinges on ultimately. If the brand is a competitive advantage, it's cheap. If the brand's value is just like any other company's(worth the amount of advertising money you put into it), it's fair price to expensive.

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#11) On February 27, 2013 at 1:22 PM, JohnCLeven (30.58) wrote:

COH up 5% on buyout rumors today. I'm calling BS. COH shareholders wouldn't take anything less than the 52 - wk high, which implies a deal well over $20 billion. Berkshire Hathaway are the only two companies that would likely be interested AND have the muscle to pull a $20B+ deal off. If it was private equity it would be near the top 10 LBO's of all time. So I don't see a sale happening.

Then again, Warren does love sky high ROE. hehe. (BRK.B and COH make up a combined 45% of my portfolio)

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#12) On July 30, 2015 at 2:45 PM, JohnCLeven (30.58) wrote:

Sold COH for a 15% loss about year ago. I learned alot about competitive destruction.

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