My phone vibrated at me the morning of 12/19 and told me Coach had hit my target buy-in price. News indicated a minor panic due to an announcement of a price reduction. Of course, it's prudent to read further. Coach has indeed reduced prices - a cause for concern. But it's on a few styles of handbags and only in its wholesale channel? I'll leave the panic to the day-traders and draw my own conclusions here.
First we need to keep in mind that Coach has retail and wholesale channels. A price reduction in the wholesale channel may well reflect a concession to a particular retailer to assist in holiday sales. In fact the retailer in this case was likely Macy's. I don't know about you but my own experience with sales at Macy's is that the sales are never on the newest, hottest items. You have to be willing to settle for last season's goods in order to succeed at the sales racks. So what we apparently have here is a concession to a large wholesaler to help move some goods that are on their way out of style anyhow. This was clearly enough to spook a market fearing a dismal December for retail but my feeling is that this is really an imperceptible blip on a 2-3 year radar.
With the new low price sorted out in my head I can simply revisit why Coach was on my list in the first place. They have posted stellar year over year growth for the past several years. I can expect that will be moderated in the near term. I believe in hindsight we will see that we are already in a recession and so the 25% or so growth that we've seen will likely not return for some time. Is it likely that Coach will be affected by a recession? Certainly. Although one should bear in mind that Coach's handbag prices are not for the faint of heart. While their market has surely benefited from some creep into the middle class, their handbags and accessories are still the status symbols of the privileged. Arguably their core client base should be less affected by an economic crunch. It does bear factoring a retail slowdown to moderate Coach's growth prospects.
But wait...let's not forget that Coach's market is not limited to the United States by any means. Coach is planning to bring its retail store count in Japan to more than 140 in the coming quarter. That offers some comfort in continuing growth. The real gem waiting to be uncovered, if you ask me, is China. Coach's presence in China is nominal at this point, and their stated plan for 2008 includes building their brand equity in emerging Asian markets in China and Korea. From my trips to Hong Kong and China the locals can't get enough of luxury U.S. goods. Assuming China can manage its raging economy there will be lots of RMB waiting to be spent on Coach's unique status symbol.
A brand can be worth a lot, and with Coach's recent stock dive, attractive P/E ratio and global growth opportunities, one can in good conscience moderate expectations of future growth and feel quite safe in expecting 15% annually over the next few years. That places the buy-in at just around $30, and so we will go long and not be concerned for overvaluation unless the price creeps up beyond $40.
Please note that I am not a short-term investor, and I look for value first and foremost. Unless for some reason there's an irrational run on a stock to uncomfortable levels I will simply hold a stock until it reaches a level where I no longer see the potential for a desirable annual return.
$30.57 (12/20/07)
