Luxury Stock
Thursday, October 28th, 2010
Written by Roopak Chakravarty
TopEquityNews.com
Many people were surprised to see the luxury goods market hold up so well during the Great Recession and the following paltry recovery. Perhaps this is a testament to the willingness of the ultra-rich to keep spending despite the economic conditions. Of course the market did take a hit, but the best firms still managed to grow despite the slowdown. It isn’t hard to find the best of breed in the luxury goods market. There aren’t many better-run firms than the one I am discussing today: Coach (COH).
Best of the Best
I was ready to go with this article earlier in the week, but then realized that Coach was set to report earnings. I didn’t want to look stupid by pushing the stock and then getting crushed after a poor report, but I should have gone with my instinct and wrote about it because the stock soared after an excellent report.
The company said that fiscal first-quarter results came in at 63 cents per share, above the estimate of 55 cents. Sales also rose 20% and beat estimates by a wide margin. “We’re feeling great about the holiday season given the current sales trends in both our full-price and factory channels,” said Michael Tucci, president of North American retail. I bet they are feeling even greater after a 10% pop in the stock price following the announcement.
How did they do this? Management deftly started selling lower-priced bags during the recession and made it up on volume. In a great sign, the company said that its average unit retail price of handbags rose a bit during the recent quarter. I think investors keyed in on this piece of information and got excited. The company is optimistic that the holiday season will be a strong one. I don’t blame them since they were able to post big sales even before the holidays.
Is it Still a Buy?
I think the shares should continue to be bought, even after the post-earnings bump. The stock is trading at about 16.5x next year’s estimates, which isn’t terribly cheap, but also not expensive for this company. I think analysts will be busy raising their estimates after this awesome quarter, which will bring down the price/earnings ratio. It sports an ROE of 46% and an operating margin of 32%, so a premium valuation is more than warranted. I would say that $65 for the stock over the next year is not out of the question.
