Skip to main content

Michael McCloskey is the founder and president of GreensKeeper Asset Management Inc., a division of Lightwater Partners Ltd.

Handbags. Handbags. Everywhere I go these days, I find myself staring at women's handbags. My recently acquired and admittedly bizarre obsession is due to my purchase of shares in Coach Inc. last month.

The fashion industry is one that I tend to avoid due to its fleeting nature. However, I perceive Coach to be a classic American brand that has staying power.

Story continues below advertisement

The company manufactures quality products, has international sourcing and distribution arrangements and 80 years of history to guide it. It has established itself as the market leader with a dominant 28 per cent share in the profitable $10.5-billion (U.S.) North American handbag and accessories market. (Louis Vuitton is a distant No. 2 with an 11 per cent share.)

Trendy competitors have stepped forward to challenge the company's dominance over the years, only to later fade away.

Women will continue to use handbags and a few men will, too. The only question is which brand they will choose to purchase.

Coach serves two distinct consumer groups. Its 650 upscale retail stores carry premium handbags that can cost anywhere from $400 to well into the thousands. For the aspirational consumer, Coach also has 235 factory outlets that offer lower priced products.

The company stands for quality products that are within reach of many consumers, unlike the ultra-rich offerings of LVMH, Hermès or Prada. Ten thousand dollars for a handbag? Really?

Financially speaking, Coach is an exceptional business. The company earns an unlevered return on equity in excess of 50 per cent, generates $1-billion plus of annual free cash flow, has raised its dividend in each of the past four years and carries around $836-million in net cash.

I recently asked a member of Coach's management what she thought about the idea of borrowing several billion dollars of cheap debt given the company's massive free cash flow. The company could then return the borrowed funds to shareholders through special dividends or share repurchases. The fact that she didn't like the idea brought a smile to my face. Coach has a conservative culture, which resonates with my risk-averse investment style.

Story continues below advertisement

The past five years have been difficult for retailers. Despite these headwinds, Coach has managed to grow its earnings per share at an annual rate in excess of 14 per cent.

Coach's success has drawn additional competitors to the market. Over the holiday shopping season, Coach saw its competitors discount products heavily. Coach chose not to, and ceded share in order to protect its brand.

Michael Kors is the hot brand (and stock) at the moment. Kors is gaining market share and growing quickly, while Coach is experiencing negative same-store sales. However, Kors' stock trades at 26 times earnings versus Coach's 12.

In a recent interview, Coach CEO Lew Frankfort referred to the recent poor holiday quarter as a "moment in time." In other words, this isn't the first challenge that we have faced in our 80-year history and we are up to the task.

The handbag category should continue to grow. Probably at a modest rate in North America, but more rapidly in emerging markets due to their expanding middle class. As a result, Coach's international segment should overtake North America in sales at some point in the next five years. If Coach can maintain its market share in North America and grow overseas through its planned store expansions, the stock will prove to be cheap at its current trading price around $50.30. If, on the other hand, competitors continue to steal market share and put pressure on its prices and margins, my investment in Coach will not be a good one.

I don't believe that will be the case. But with a spouse and two daughters who already own numerous Coach handbags, at least I will ensure my household's disposable income will be flowing into a company where I can enjoy some of the rewards.

Story continues below advertisement

GreensKeeper, its affiliates, and certain accounts managed by them may hold long or short equity positions of a profiled company and may from time to time trade in these securities.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter