Smart Investing


August 24, 2012


Sizing up Coach in a tough retail market

We are in a difficult time, and when it comes to retailers, only strong, well-run businesses are proving successful.

Guess Inc. (NYSE: GES) reported earnings, and while it only missed by a penny, it reduced the guidance going forward, and within two days the stock lost 23 percent of its value.

Prior to this drop, the stock was not that pricey, trading at a forward PE of 11.5. With the drop in the stock, that forward PE is only 8.6 times. While the earnings estimates will probably come down, I doubt they will drop 23 percent.

In today’s column, I want to discuss another retailer that I’ve liked for years, and even owned some years back — I’m talking about Coach Inc. (NYSE: COH). If you’re married or have a serious girlfriend, you would be wise to learn the name.

The company offers primarily handbags, footwear, jewelry and fragrance products. One can recognize its products by the big “C” logo, displayed for all to see.

The company has around 345 retail stores and 143 factory-leased stores in North America. I thought this was a fairly new company, because I had just heard about it five to 10 years ago, but the company has been around since 1941. I guess I was out of the fashion loop.

The stock traded as high as $79.70 back in March of this year and has now fallen to the mid-50s range. Based on my new selling forward multiple of 16.5, it appears as if I would have sold this somewhere around the high 70s.

But now the stock has dropped and the forward earnings per share have increased to $4.43 for the year ending January 2014, yielding a FPE of 12.4, below the current PE of 15.7. The forward estimate of $4.43 is down nearly 10 percent from 90 days ago when the EPS estimate was $4.88 per share. Over the last four quarters the company managed to beat the EPS estimate by a few pennies or so. At current levels the company has a nice PEG ratio of 1.04.

A couple of the valuation ratios look high, like the price to sales at 3.35, well above the industry average of 1.25. Price to book value is roughly 53 percent higher than the industry average of 5.70, compared to the company at 8.0. The industry PE is at 20.4, well above Coach's 15.7.

Coach does pay a higher dividend than the industry at 1.67 percent, and the industry uses 34 percent of its earnings to pay that dividend. Coach pays a 2.2 percent dividend and only needs 27 percent of its earnings to pay that yield. It looks like Coach can be this generous because it has seen its sales climb 14.5 percent year over year, when the industry has only seen its sales rise by 7.9 percent.

Earnings for Coach also grew nicely, up 21 percent year over year, while the industry average only saw a 13.7 percent increase in its earnings over the same time period.

I remember I really liked Coach's balance sheet before, and that has not changed. It has a current ratio of 2.5, just slightly over the industry average of 2.4, though both are good numbers.

The company is sitting on $917 million in cash, has no goodwill or intangible assets, and with total debt of only $23 million and equity of nearly $2 billion, the debt to equity is just over 1 percent.

This is one of those companies that should take advantage of this low-interest-rate environment and float some debt to buy back some of its shares. So far this year, the company has bought back about $387 million in stock, but the share count is only down about 7 million shares from last year. The company could do so much more and see its shares climb 20 to 30 percent in a short time frame.

Return on equity is unbelievable at 57.6 percent, more than double the industry average of 24.2. Sometimes investors will see high ROEs because the company has such low equity. That is not the case here. With the company having equity of nearly $2 billion, the higher ROE appears to come from great earnings. The high ROE could also be attributed to a high profit margin of 21.8, over three times the industry average. When looking at the income statement, I saw nothing funny going on with the earnings, so that nice profit margin is for real.

Receivable turnover for Coach looked good at 30 times over the last 12 months compared to the industry average of 24.4 times. Inventory turnover for Coach didn’t look that good at 2.8 times over the last 12 months when the industry was at 3.8 times.

I checked the income statement and the balance sheet, and the inventory does not appear to be rising faster than the sales. The reason for the lower inventory turnover number could be because this is a higher-end retailer, and in this industry there will be other retailers that have lower-priced merchandise and turn over their products much quicker.

Have a question or a company you'd like me to take a look at? Email me at

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


August 24, 2012