Collins Counts on Coach

01/03/2003 12:00 am EST

Focus:

Jim Collins

Chairman and CEO, Insight Capital Research & Management, Inc.

Jim Collins describes his approach to stock selection as a funnel, in which thousands of stocks are poured in at one end, and then subjected to a variety of proprietary screens. Only a limited few survive the process and only the strongest potential stocks come out at the end of the funnel. Here, the editor of Listed Insight and OTC Insight offers his 2003 favorite, the high-end accessories retailer, Coach.

"Coach (COH NYSE) is one of the top specialty retail companies in our portfolios. It recently reported revenue growth of 28% year-over-year and earnings per share growth of 71%. One of their key strengths has been their ability to steadily grow margins. Coach has seen impressive improvements in gross margin as they have introduced more non-leather products.

"In addition, they changed their sales model in Japan (the number two accessories market in the world) from a wholesale one where they sold to department stores to a retail one where they partner with a local company to open retail stores. Japan continues to perform very well and they have just opened their second Tokyo flagship store. They have the potential to significantly grow their market share in the next few years as the brand demonstrates strong acceptance.

"What distinguishes most retail stories is the execution of the management team and Coach is no exception. CEO Lew Frankfort and his team meet together more frequently than most competitors, and ship product to their stores and department store partners on a monthly rather than quarterly basis. This allows them to adjust for changes in selling trends. Also, each year they produce four times as many designs as they will end up releasing, and test each new design in a cross-section of their retail stores to make sure that their products are going to be hits. Improvements in margins and continued excellent execution should result in continued earnings surprises and strong stock performance."

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