Tom Gardner, The Motley Fool Stock Advisor
Tom Gardner is a frequently sought-after investment expert, commentator, and educator. He cofounded The Motley Fool in 1993 with his brother, David. Today, The Motley Fool is a worldwide investment advisory company offering superior ideas and solutions to millions of people each month. He currently serves as The Motley Fool’s CEO. Tom is the lead advisor for Million Dollar Portfolio. He is also the co-advisor of the market-thumping general equity service, Motley Fool Stock Advisor. In addition to co-authoring several New York Times best-selling books, including The Motley Fool Investment Guide, The Motley Fool You Have More Than You Think, and The Motley Fool Investment Workbook, Tom has also testified on behalf of individual investors before the US Senate, calling for greater transparency in the financial services industry.
Coach (NYSE: COH)
Does it make me any less of a man to admit that I admire women's accessories? I hope not, because I've noticed one brand that is capturing the hearts of the female consumer in a big way.
Had you asked me a year ago what I thought about Coach (NYSE: COH), I'd have answered, "Great stock, but too pricey." That story has changed. For the past year, investors have punished retail stocks because of zooming oil prices and fears that consumer spending is in complete paralysis. Nobody wants to touch retail stocks right now.
Over the past year, Coach has lost more than half its value. So now is it time to buy Coach? I think so. We're getting a wonderful pedigree, amazing brand power, healthy international growth, and dedicated leadership ... plus a more than appealing price tag. It's the opportunity I've been waiting for.
It's in the Bag
Founded by six artisans who crafted high-quality leather goods from skills passed down through generations, Coach today represents classic American style through its prestige handbags, briefcases, luggage, and accessories. Though it sells a full suite of finely crafted goods, nearly two-thirds of the company's revenue comes from its extremely popular handbag lines.
Coach's more than 350 stores in the United State pull down about 75% of its revenue. Although domestic growth is still very strong, Coach is positioning itself for the next decade by aggressively pushing new merchandise and product innovation and also entering new markets such as Russia, Greece, and Hong Kong to complement its existing presence in Japan.
CEO Lew Frankfort has been at the helm for more than 12 years, and his history with the company goes back two decades. Frankfort constantly surveys his customers, hoping to deliver great products and even greater customer experiences. It's one of the main reasons Coach has thrived.
Luxury on the Cheap
Coach's exceptional operational model -- with multiple sales channels, offshore manufacturing, superior brands, consistent innovation, and a passion for customer service -- delivers an extremely profitable financial model, and Coach is sitting pretty financially. The company sports a pristine balance sheet with close to $700 million in cash (an impressive 18% of revenue), little debt, and reasonable working capital needs, so we’re looking at a market leader that's built to last.
Not long ago, Coach's handbags weren't the only pricey thing about the company. The stock traded at $45 a share, too expensive for to its growth expectations. Many investors were willing to pay up, but I needed it to cool down considerably first. Well, I thought the stock was a great deal when it hit $23. Today, it’s sitting at a rock bottom price of $17!
Unlike its $400 bags, Coach's shares are bargain-bin cheap, selling at about 8 times earnings for a company that earns almost $0.50 for every $1 invested in its business. Looking out over the next five years, I think Coach can generate nearly 20% annual returns -- much greater than anything we can expect the overall U.S. market to muster. While you will never be able to buy a Soho purse for cheap at Coach's flagship Bleecker store, you can pick up Coach's stock at a very nice discount to what I think they'll be trading at by 2013.
Before you place that trade, however, it’s important to note that the high-fashion landscape is ferociously competitive -- and that could easily lead to Coach being underpriced by its peers, among other problems. The brand, too, could become diminished if not properly managed. In other words, if we start seeing Coach bags heavily discounted in low-end department stores, I'll get worried.
Foolish Bottom Line
The garment district is littered with fashion fads that came and (thankfully) went. And like the fashions themselves, there are investors out there who loved Coach's stock at $45 and now hate it. I'm not one of them. I've always loved the company and thought it would make a solid addition to any investor’s portfolio, but I never felt the price was right. After a 60% drop, I've gotten more than I could have possibly hoped for.
This fashion icon is just getting warmed up, and unlike most of its handbags, the stock is now on sale.