Coach Keeps Rolling

03/29/2010 1:50 pm EST


Jim Jubak

Founder and Editor,

I’m filing this update from the beach. I’m on vacation the week of March 29 to April 2. Unless the sun stops shining here in the Bahamas (or the kids decide to hire themselves out on a fishing boat), I don’t anticipate filing more than once a day for this week. We will go back to the normal schedule on Monday, April 5. JJ
Let it run!

Coach (NYSE: COH) hit my October 2010 target of $40 last week, but the numbers on the US economy look good enough in the short run and the momentum of US stocks is strong enough right now that I’m going to keep this money on the table. (For more on why the US stock market is likely to be the best performing stock market in the world in the next three months or so, see this March 19 edition of Jubak's Journal.)

I think Coach has done a great job of navigating through the economic slowdown by shifting its price points and managing the mix between its full-price and outlet stores so that sales stayed strong but margins didn’t take too much of a beating.

Now, Coach gets to reap some of the reward for handling the downturn so well.

With growth picking up in the US economy, Coach’s mix will shift again, but this time back in favor of its full-price stores. In those stores, customers will find lines that fit these recovering but still not flush times. Coach has added products to keep 50% of its handbags at $300 or less. The shift in favor of full-price stores should drive gross margins higher: Standard & Poor’s is looking for gross margins to improve by about 0.3 percentage points in the fiscal 2010 year that ends in June.

The long term for the company looks solid, too. Coach finished 2009 with about $1 billion in cash. That should be more than enough to fund the company’s planned expansion in China, where the company now owns just 4% of the luxury goods market.

As of March 29, 2010, I’m raising my target price to $44 a share by October 2010.

See the complete Jubak’s Picks Portfolio here.

Full disclosure: I own shares of Coach in my personal portfolio.

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