Friday, May 3, 2013

Finding Undervalued US Stock: Coach Inc

Coach is one of the most recognized brands in the luxury goods industry. It is a leading marketer of fine accessories for women and men, including handbags, women’s and man’s leatherwear, footwear, travel bags, watches, fragrances and related accessories. Coach was established in 1941 and sold to Sara Lee for $30 million in 1985. Sara Lee Corporation then sold 19.5% of the shares in an IPO in October 2000. Since listing of the company in New York Stock Exchange, Coach has grown to be the number one brand within the U.S premium handbag and accessories market.

Business Model
Coach’s merchandise is sold through Coach stores, factory outlets, select department and specialty stores, duty free locations in airports and online via their website, It groups its business into 2 segments, namely Direct-to-Consumer and Indirect. Over 85% of the company’s sales are generated by Direct-to-Consumer segment, with the majority of the sales coming from selling handbags and accessories.  

Coach markets itself as selling “accessible luxury” and its pricing strategy for a handbag ranges from $298 - $1000 which means that its product reaches a larger consumer demographic than other high-priced competitors such as Louis Vuitton, Prada which focus on the very wealthy.  The strategy of targeting the higher and upper middle income shoppers differentiates Coach from its competitors and also helps to establish it as the poster child of tapping into this global trend of consumers wanting to trade up in the quality and style of what they buy.

As Warren Buffett says “In business, I am looking for economic castle protected by moats”, Coach has a narrow moat and competitive advantage. It has a strong brand presence in the luxury market and this is not easily eroded by other competitors. New competitors into the luxury brand industry will have to spend a large amount of money and resource to build up brand awareness and image. There is also consumer loyalty as Coach has been delivering high quality products that is simple, reliable and perceived value for the money.
To further grow the business, Coach has outlined its strategy of (i) raising its brand awareness and market share in under-penetrated Asian market with China being the top targeted market (ii) growing its woman’s business in North America and European market (iii) increasing its men’s business in North America and Asia (iv) maximizing e-commerce sales

Why is Coach a screaming buy?
Coach is a great company to invest in for a multitude of reasons. Coach has executed its strategy successfully over the past decade. Its revenue has grown progressively every year at a compounded growth rate of 21%. This is a mean feat considering that it is in a highly competitive sector. It has also showed that it is able to grow through strong or weak economies as evident by the increase in sales in 2009. The ability to keep increasing revenue shows the strength of its pricing strategy.

To find out why Coach is a undervalued stock that could turn out to be a multibagger, click here

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