Coach Inc: An undervalued Luxury Brand


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.

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.

Revenue Growth

Coach has maintained high gross margin and net margins. A high gross margin signal market leader position and pricing power. The gross margin has averaged 74% over the past 10 years while average net margin is 24%. In fact, Coach has the highest margins as compared to its competitors

Highest Gross Margin

Coach has no long term debt on its balance sheet. Financial metric of Return on Equity (ROE) and Return on Asset (ROA) is impressive with ROE consistently above 35% and ROA above 25%

High ROE and ROA

Operating cash flow has been positive for every year for the past decade. With the growing free cash flow, Coach has been returning a large percentage of these excess cash to its shareholders by actively purchasing back shares.  Beside share buyback, Coach has doubled its dividend payout in the past three years

Valuation of Coach

Coach is currently valuedat 13 times current earnings and is priced at a much cheaper valuation than its high-end luxury goods counterpart.  The depressed valuation makes Coach a great stock to own. 

The company’s highly profitable business model, combined with an outstanding management team, durable brand and free cash flows makes Coach a potential compounder. If the company is able to execute its growth strategy of capturing a bigger share of the Asian market, especially China, Coach will likely deliver increases in both its share price and its dividend payout over the next five years. All the factors combined could result in a multibagger total return for investors in the long run.