Valuation: Coach, Inc. (COH)

Company Profile:  Coach, Inc. (COH) (obtained via Google Finance)

Coach, Inc. (Coach) is a designer and marketer of handbags and accessories. The Company offers luxury lifestyle accessories to the customers and provides consumers with fresh and relevant products. Coach’s handbags and accessories use a range of quality fabrics and materials. Coach’s primary product offerings include handbags, women’s and men’s accessories, footwear, outerwear, business cases, sunwear, watches, travel bags, jewelry and fragrance. It operates in two business segments: Direct-to-Consumer and Indirect. Handbag sales accounted for approximately 64% of net sales during the fiscal year ended June 30, 2007 (fiscal 2007). Accessories sales accounted for 28% of net sales during fiscal 2007.

Business and Management Review
1) Is the business simple and understandable?
Coach is a luxury retailer – a simple and understandable business.  There is nothing complicated to be concerned about.

2) Does the business have a consistent operating history?
The company has been creating high quality leather goods for over half a century.  Over the years the company has added to its product line but has never strayed from its original strategy of creating outstanding leather products for the consumer.

3) Does the business have favorable long term prospects?
The luxury goods market is favorable long-term as people will continually be looking to purchase status related products.  However, the company could potentially see some business cycle related issues whenever consumer discretionary spending drops.  That said, it could be also expected that the higher end of consumers may not be as adversely affected by swings in the business cycle leading the effect on Coach to be negligible.

4) Is management rational?
Management has maintained a very strong balance sheet for a number of years.  The company is very low on liabilities – especially long term debt.  Accordingly, it appears that management is very competent and rational.

5) Is management candid with its shareholders?
The company maintains a candid and thorough investor relations page.

6) Does management resist the institutional imperative?
We find no reason to believe the management is following the institutional imperative.

Financial and Value Review

1) Size of firm
The market cap of Coach is $13.55 billion.  Pass.

2) Strong financial condition
The company’s current ratio is about 4.26, far above the 2.0 requirement.  Pass.

3) Earnings stability
The company has had a positive net income for over 10 years.  Pass.

4) Dividend record
Coach has not consistently paid a dividend for over 10 years.  Fail.

5) Earnings growth
Earnings have grown more than 1/3 over the last 10 years.  Pass.

6) Price to earnings analysis
With a PE ratio (using our Methods) of 33.86, the requirement of under 20 is not met.   Fail.

7) Price to assets analysis
The Price to Book ratio for Coach is 8.09, higher than our 2.5 limit.  The multiple of PE to PB is much higher than our requirement of 50.  Fail.

Having passed only 4 of the required 7 tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Coach is suitable for the defensive investor.

1) Strong financial condition
The company’s current ratio is above 1.5 and debt to net current assets is less than 1.1.  Pass.

2) Earnings stability
The company has achieved a positive net income for over 5 years.  Pass.

3) Dividend record
The company currently pays a dividend.  Pass.

4) Earnings growth
Earnings are greater today than they were 5 years ago.  Pass.

5) Price
The price is not less than 150% of the net tangible assets.  Fail.

We find the company to be suitable for the enterprising investor, having passed 4 out of 5 tests.

Our valuation model finds a fair value to be around $31.  

Since the company is currently trading at about $36, we feel it is slightly overvalued but may be a suitable investment for the enterprising investor if falls closer to its fair value.

None of the staff of held a position in Coach at the time of publication.  Also, please read our disclaimer and Our Methods.