In the July 2011 issue of the Investor Advisory Service we recommended Coach, the maker of handbags and fashion accessories. This midsized company had revenues in 2010 of $4.1 billion, and had grown earnings per share at an annualized rate of more than 25% since 2002. How have the company and its stock performed in the year since that time?
Apparel companies have suffered in the recession, but the fashion accessories category has proved surprisingly resilient. Consumers facing tighter shopping budgets are allocating more money to items they can get value out of every day. Coach (Ticker: COH), a leader in handbags, has benefitted, growing with a combination of savvy retailing in North America and a push into high-growth international market, particularly China.
We started following Coach in the IAS in November 2007. Shares got off to an inauspicious start, declining from $45 to under $12 in March 2009. We highlighted the shares again in May 2009 at $17. It’s been almost straight-up for the company since then, although a recent pullback from the high 70’s to the low 60’s has erased most of the last year’s gains.
As of this writing, COH shares are still above their $59 price from July 2011, the last time we highlighted the company. The big question then was how the company would deal with the after-effects of the Japanese Tsunami. Coach has a big business in Japan, which has rebounded nicely after a couple of difficult quarters in 2011.
There is a lot to like about an investment in Coach. Fashion companies don’t always operate in shareholders’ best interest, but Coach protects its margins, controls costs, manages cash, and returns money to shareholders through a combination of stock buybacks and a rising dividend. The company’s retail stores just keep getting better, as evidenced by continued comparable store sales growth in North America. A recent reshuffling of executive duties should lay the foundation for the brand’s continued evolution.
Shares tend to be volatile, maybe undeservedly so. The first reporting quarter after our July feature, Coach reported good growth along with very strong guidance. Shares fell nonetheless, well below our buy-up-to price. The stock rebounded into the low 60’s as the company began to illustrate that it was executing nicely on its rather aggressive growth plans. By March 2012, Coach had swung firmly back into investors’ good graces. Simply by executing on the plan it had previously put forward, Coach rallied to $75. That’s a big swing for a stock that had traded below $50 just six months earlier, considering that the business was chugging along steadily. Guess what we saw in the most recent reporting quarter: more of the same. The stock was probably a little ahead of itself, as investors expressed disappointment with 17% sales growth and a 24% increase in EPS.
We see this pattern play out all the time in the IAS. A business plugs along at a nice rate of growth, while the stock fluctuates wildly. True, every growing business eventually hits a ceiling, but it’s remarkable how little confidence investors are willing to place in a company demonstrating that it is in the sweet spot of a growth phase. There’s no telling what the future will bring for Coach, or any IAS stock for that matter, but treating pullbacks as buying opportunities can be a good strategy when the investor has confidence in the fundamentals of the underlying business.
Disclaimer: This company was selected for review in part because of its performance over the past year. Any outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.