Shares in luxury goods companies boast the allure of strong growth prospects but this is usually tempered by their anxiety-inducing price tags. But US accessories brand Coach offers investors a chance to get into the sector at a big discount to the average rating at a time when the company's own Asian-fuelled growth story looks ready to take off.
- Growth potential in Asia
- Consumer recovery in US and Japanese markets
- Brand expansion
- Wide margins
- Weak yen
- Tough competition in fast-growing markets
Few people in the UK will have heard of Coach, despite it being a $16.5bn (£10.7bn) global purveyor of handbags and accessories. Unlike some of its better-known peers, such as Ralph Lauren and Burberry, Coach isn't big in Europe, with the vast majority of sales generated in the US (68 per cent in 2012) and Japan (18 per cent). Economic prospects are starting to look up in both regions. However, fast-growing Asian economies are the real growth hotspots for luxury retailers and, with the exception of Japan, the brand is still relatively under-penetrated in the region. But armed with a hefty amount of cash, Coach is now expanding in places such as China, South Korea and Malaysia, with its sights set on turning into a "global lifestyle brand", and the strategy is already showing some signs of success.
Coach focuses on "affordable luxury", catering to people who can't spend thousands on a bag, but are willing to part with a few hundred. As consumerism in developing markets evolves, that kind of price tag could bring major advantages because, unlike traditional exclusive European luxury brands, Coach appeals to a much broader range of people in the growing middle classes. As well as driving into fast-growing markets, Coach is also investing in expanding its ranges.
Coach's sales and profit growth suggests the strategy is working. The expanding menswear range, for example, is on track to grow 50 per cent to $600m by the year-end. Meanwhile, in the third quarter Coach reported a 7 per cent rise in sales to $1.19bn and a 10 per cent EPS increase. Much of this was driven by Asia despite the fact that, excluding Japan, Coach has just a tiny fraction of the luxury goods market there.
| COACH (COH) | ||||
|---|---|---|---|---|
| ORD PRICE: | $58.91 | MARKET VALUE: | $16.5bn | |
| TOUCH: | $58.86-$58.91 | 12-MONTH HIGH: | $75.87 | LOW: $45.87 |
| DIVIDEND YIELD: | 2.3% | PE RATIO: | 14 | |
| NET ASSET VALUE: | $7.09 | NET CASH: | $906m | |
| Year to 30 Jun | Turnover ($bn) | Pre-tax profit ($bn) | Earnings per share ($) | Dividend per share ($) |
|---|---|---|---|---|
| 2010* | 3.61 | 1.16 | 2.36 | 0.30 |
| 2011 | 4.16 | 1.30 | 2.99 | 0.60 |
| 2012 | 4.76 | 1.51 | 3.60 | 0.90 |
| 2013** | 5.11 | 1.60 | 3.79 | 1.20 |
| 2014** | 5.59 | 1.82 | 4.33 | 1.35 |
| % change | +9 | +14 | +14 | +13 |
Matched bargain trading Beta: 1.56 *53-week year **Atlantic Equities forecasts £1=$1.55 | ||||
Trade in China, for example, represents roughly 8 per cent of total sales and is booming. Management recently nudged up its full-year revenue forecast to $425m from $400m, while third-quarter sales rocketed 40 per cent. Even comparable store sales in the China increased at double-digit rates at a time when other retailers are reporting slower growth. However, while third-quarter sales in Japan were flat, the falling yen wiped 14 per cent off their value.
As for the western world, low exposure to an economically paralysed Europe has helped. In North America, Coach runs 352 retail stores and 191 factory outlets, but believes the region can support 500 retail stores and industry-leading margins support the rationale for expansion.
