Coach's Surprising Strength

While it only happens some of the time to even the best investors, it's certainly pleasant to see a stock you believe in do well. Earnings reports like Coach's (NYS: COH) yesterday make it easier to suffer through all the falls that investors experience during the year. The handbag company has seen excellent overseas sales, and North American sales have kept up strong growth. And there's even more to come: With a new focus on menswear, Coach looks like a completely refreshed brand. Here are the highlights and what to expect from Coach for the next few quarters.

First-quarter earnings beat expectations
Coming into yesterday's earnings release, Coach was largely fighting a picture that it had painted of itself earlier in the year. In July the company announced that its fiscal 2013 was going to be an investment year -- never mind what the opposite would entail -- and investors ran for the hills. The stock, which was back to January levels before the announcement, dropped 19% overnight. Since that low, investors have realized that maybe it's not going to be all that bad, and the stock has regained a bit of ground.

But even with the rebound and yesterday's pop, there's still excellent value to be found in Coach. In the last quarter, the company met top- and bottom-line expectations, earning $0.77 per share off $1.16 billion in sales. Revenue increased 11%, while EPS increased 5%. Coach also announced a $1.5 billion stock-repurchasing program, which is a well-timed move with the stock still trading at a depressed price.

Operating margin fell from last year, but is still strong at 29%. The company saw an increase in selling and general costs, which is attributed to the recent acquisition of Korean and Malaysian business units. In its expanding international market, Coach grew sales 15% while domestic sales grew 8%. American sales were helped along by 5.5% growth in same-store sales, while the international segment had double-digit same-store sales increases. Much of the recent sales increase has been attributed to the company's expansion of its menswear line.

The future of Coach
On the conference call discussing results, CEO Lew Frankfort highlighted the menswear movement that Coach is undertaking. The company is planning on opening 30 new stores in China, and all of them will be dual-gendered. One of the most overlooked growth areas open to Coach is the male market. lululemon athletica (NAS: LULU) has made a similar move, increasing its menswear range. Both companies recognize that by catering to women, they have an in-road to men who are either buying gifts or who might be the recipients of gifts.

The move into menswear puts Coach in more direct competition with Michael Kors (NYS: KORS) , which has recently overshadowed any good performance that Coach may have had. Kors has posted over 35% same-store sales growth for the last three quarters, and the stock currently trades at a ludicrously high forward P/E of 29. Coach, on the other hand, is still working with that whole "rebuilding year" idea and is only trading at 13 times forward earnings.

Over the next year, that's going to change. Coach is expanding its footprint in China, and it aims to increase its total global footprint by about 10%. That includes opening 10 menswear-only stores in the U.S. Those will not only help drive the brand, but should act as excellent barometers for investors. On top of the store expansion, Coach is going to open its online store in China, tapping into a huge market.

The Boston Consulting Group released a report this year estimating that online sales in China will triple by 2015. At that point, it's estimated that close to 10% of all retail sales will take place online. Coach is getting ready to tap into that market, and I think sales are going to pop once the brand gets a little more attention.

The bottom line
Increased sales, the addition of men's products, and the heavy push into China all add up to good news for Coach investors. Due to the company's low relative price and earnings potential, I think Coach is still a solid buy. While there is a lot to be said for Kors, it's quickly moving past the point of affordability, and the breakneck pace is going to catch up to it sometime. I'm much more comfortable with the steady growth and clear plan that Coach has in place.

That plan is one of the reasons Coach made the Fool's list of 3 Companies Ready to Rule Retail. In this special report just for Motley Fool readers, you'll get even more detailed insight into Coach, and uncover all the details about the other two companies. Click here to get your free copy today.

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Fool contributor Andrew Marder has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach. Motley Fool newsletter services recommend Coach and lululemon athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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