Coach Has Asian Growth in the Bag

05/02/2011 4:04 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

As my grandmother used to say, “Build a better cookie cutter, and the world will beat a path to your door.”

Coach (COH) has done just that. The company developed a successful strategy for going overseas when it built a business in Japan from its US base.

Coach now holds a 16% share of a country that counts for 40% of the global market for luxury handbags. (Coach also has 20% of the US market, Standard & Poor’s estimates.)

And now the company is applying the same strategy to China. S&P estimates that the company holds about 4% of the Chinese market for luxury handbags.

I think you can see where the company thinks this story is headed. As of the end of the fiscal third quarter that ended April 2, Coach had 344 retail and 134 factory stores in North America, 174 stores in Japan, and 55 in China.

Of course, a company still has to execute that strategy. For the fiscal third quarter, announced April 26, Coach reported earnings of 62 cents a share—2 cents a share above the Wall Street forecast. (Coach estimated that the Japanese earthquake and tsunami cut roughly 2 to 3 cents off earnings. Seven of the company’s Japanese stores were still closed at the end of the quarter.)

Revenue climbed 14.4% from the third quarter of fiscal 2010, to $951 million. That was slightly above Wall Street projections of $947 million. Operating margin came to 29.4%, versus 30% in the year-ago quarter.

And the future? Coach says it will open 30 new stores in China in 2011 and 2012. Standard & Poor’s estimates that sales will climb by 15% in fiscal 2011 and 11% in fiscal 2012.

Coach’s board of directors seems to think that growth is likely. It voted to raise the dividend by 50% to an annual 90 cents a share, effective with the dividend to be paid in July.

The stock isn’t especially expensive, given that story—the company is trading at 20.6 times trailing 12-month earnings per share. Wall Street is projecting earnings growth of 23%.

As of April 29, I’m raising my target price to $68 a share by December 2011, from my earlier target of $64 by September.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Coach as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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