Lower-Priced Lines, Asia Expansion Should Help Coach Earnings

Investors will get a peek at the prospects for a luxury market comeback if Coach (COH) meets analysts' expectations for a strong holiday when it reports its second fiscal quarter earnings Wednesday morning.The leather goods and accessory company is expected to show earnings growth of 7.5% in the quarter ended Dec. 31, with earnings per share of 72 cents, up from 67 cents in the year-ago period. And unlike many retailers who are benefiting from a comparison to the shopping debacle of Holiday 2008, Coach's results in late 2008 were only slightly below the year before -- net income was only down 2% and sales dropped 4% -- so any growth in this quarter is real.

Investors like Coach; they have bid up the stock from a 52-week low of $11.73 in March 2009 back up to close at $36.79 Friday. Most recent analysts' reports have set price targets of $40 per share on the stock; according to First Call, the analysts' consensus rates the stock a buy.

Investors appreciate that Coach has diversified its game to be more recession-resistant. It added lower-priced lines to cater to price-bound shoppers, like its Poppy brand of purses starting around 20% below Coach regular prices, as well as other accessory lines and small leather goods. It is also expanding aggressively into Asia, where its brand carries cachet and local economies didn't slide as deeply as the U.S. and Europe,

"Management's execution during the economic downturn has been masterful," according to an opinion by Oak Value Capital Management, which counts Coach as one of its top 10 holdings. Oak Value's portfolio managers believe Coach's expansion into the Chinese market has been better than expected and there is even more potential in other Asian markets. While the stock already gained more than 11% in the last quarter, Oak Value's managers think it still has more upside.

Investors can take some encouragement from Burberry Group Plc (BURBY), another status brand that just reported an unexpectedly strong holiday. After several down quarters, the British company racked in a 12% increase in sales, including a 10% comparable-sales increase in its own stores, way ahead of analysts' expectations. And that follows a report from Tiffany & Co. (TIF), which earlier this month hiked its forecast for its 2009 results after having a stronger-than-expected holiday season.

So despite reports that it's only the uber-rich that are shopping for luxury items again, there may be some life in the "aspirational" market, after all.
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