No. of Recommendations: 6
Coach On Clearance Sale
If this stock pitch were a storefront, there'd be a line a mile long to get in. All it takes is two four-letter words in the same sentence -- "sale" and "Coach." Wait two beats and the buying frenzy starts right on cue.

Memo to investors: What are you waiting for? Coach (NYSE: COH) shares are selling near their 52-week low (around $25 from nearly $50) -- in retail terms we're talking
Salvation Army prices.

Instead, worries about the worsening economy and general retail angst has Coach and its peers piling up in the markdown bin.

Fashion Blunders: Stock Price Performance
YTD 12 Months
Coach (COH) -18.7% -45.4%
Polo Ralph Lauren (RL) -13% -32.5%
Abercrombie & Fitch (ANF) -29.9% -22.7%
J. Crew Group, Inc. (JCG) -37.6% -39.6%
Luxottica Group Spa (LUX) -19.9% -29%
Louis Vuitton (LVMH) -0.7 -3.5%

Let's be honest: We're not talking tapered-leg, acid-washed jeans. Wall Street isn't known for its fashion savvy, so it's no surprise that it has tossed this premiere luxury accessories maker into the scratch-and-dent fashion heap.

Big mistake: The reality is that the Coach brand is not broken. In fact, in my opinion it's still looking sharp on five of key criteria.

Four places Coach has it in the bag
1. A strong brand: Coach practically created the "affordable luxury" accessories niche, with leather bags, belts, wallets, etc. on par with the finest European high-end leather makers. It lives up to the descriptive by sourcing materials from Italy and getting the labor done elsewhere for a fraction of the cost its competitors pay (about 10% off the average $50 an hour).

Handbag sales account for roughly two-thirds of the company’s revenue, however the company also has licensing agreements with Movado (watches), Marchon Eyewear (sunglasses) and the Jimlar Corporation (footwear).

2. A sustainable competitive advantage: Coach is the little black dress of accessories. (Translation for the fashionese-challenged: The quintessential wardrobe staple -- the timeless standard you confidently reach for year after year after year.) Forget those grandma-ish designs of the past. Under the direction of chief designer and president Reed Krakoff, whose pedigree includes a stint at Polo/Ralph Lauren, the company has consistently rolled out fresh designs still in keeping with its "modern classic" M.O. Speaking of pedigree...

3. A superstar management team: The management team reads like a “Who’s Who” list of the best American brands, hailing from, J. Crew, Timberland, Hilfiger, Gap, Victoria’s Secret, Aeropostale, Sean John, and, as mentioned before, Polo/Ralph Lauren.

4. A clear growth strategy: Coach is a control freak about the brand -- from manufacturing, marketing and now distribution. In recent years Coach has shifted its focus from manufacturing to marketing and sales. Coach is focusing on building its international following. Current retail operations include retail (259 stores), factory stores (93), department store locations in the U.S. (900) and internationally (140), department store store-in-stores (137), and retail store and duty free shops in 21 countries.

Geographically, Coach’s net sales come primarily from the U.S. (77%, with Coach planning to add 40 stores this year), with Japan accounting for 18% of sales the remaining 5% primarily from East Asia. And therein lies the exciting Part II of the Coach story -- an American modern classic conquers the world. This year look for Coach to:

Optimize the Japanese business: The company is driving growth in Japan (18% of revenue currently) by opening about 10 new locations in Japan in fiscal 2008 with a goal of supporting a total of 180. Coach is taking over full control of the overseas infrastructure. The company recently took the helm of its distribution in Japan instead of farming it out to a third party. Coach Japan Inc. is now wholly owned by Coach.

Build infrastructure in China, Korea and Hong Kong: In fiscal 2008 the company plans to open about 30 new locations in these emerging markets, including eight in Greater China. It just opened a new flagship store in Hong Kong -- the largest outside of the U.S. In May the company announced that it will buy out the retail businesses in China, Hong Kong and Macau from ImagineX.

Cautious optimism ahead
Control and keeping the product offerings fresh are two main emerging themes that will drive the Coach business.

With the acquisition of ImagineX, Coach is better set to replicate its success in Japan where it is swiping market share away from the European luxury brands. In 2000 Coach had just 2% market share in Japan compared to Louis Vuitton’s 33% and more than 10% each for Gucci and Prada. Today Coach has 12% market share, Louis Vuitton 27% and Gucci and Prada less than 10% each.

In China, Hong Kong and Macau, Coach currently commands 3% market share of the $1.2 billion handbag and women’s accessories market, leaving plenty of room to accessorize the masses. According to CEO Lew Frankfort, if the company can replicate what it did in Japan its business will double in the next four or five years.

The "Buts"
With 77% of its current sales coming from the U.S., Coach is scrambling for ways to offset the economic pressures. In the Fall the company will launch a new retail concept -- its Legacy stores (capitalizing on the brand’s lore and its original Legacy line). These locations will carry exclusive, limited-edition products and feature the company's emerging collections. Maybe the super-rich don't bat an eye at $700 handbags (and perhaps international tourists taking advantage of the weak dollar and drop some serious coin in Coach's exclusive stores). Still, The concept seems out of alignment in the current belt-tightening environment.

On the product front this year the company plans to broaden its offerings by hitting a wider range of price points. Plans are motion to introduce handbags at the higher end ($900 compared to typical price points in the $300 to $600 range) and lower end ($200 to $250) to snag more of the aspirational masses.

It's a smart strategy for most manufacturer/retailers. However, in the "affordable luxury" category, going too low could end up alienating the core customer who buys Coach as much for the cachet as the quality. Go too far in one direction and you end up diluting the brand appeal and opening yourself up to more knockoff artists -- both misofortunes that have plagued Louis Vuitton, Polo, Dior, and Gucci.

The Bottom Line
For investors angling for a strong brand with an appealing legacy, mass appeal, a stellar management team and strong international prospects, Coach has it in the bag.

I'll eventually take a 3% to 5% position in Coach in my StockTrak portfolio by buying in thirds.

Hope you enjoyed... would love any feedback from the team!
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