I'm sure the last thing on the mind of daily commuters who are paying $4 a gallon for gas is the purchase of a luxury handbag from Coach (NYSE:COH). While retail purchases for the masses in the U.S. may be close to a standstill, Coach is prepared to preserver by operating on a global scale.
The company is banking on future growth for its luxury merchandise from fast growing countries like China and India where GDP growth is hitting or near double digits rates. The idea is to capture the growing appetite of consumers in these countries whose taste for the good life is on the rise.
Asia: Where Outsourcing and High-End Markets Meet
The majority of Coach's revenue is generated from its ever changing line of stylish and popular handbags. Coach controls the sourcing of its raw materials from offices in Hong Kong, China, South Korea and FlorenceItaly. Its manufacturing operations are carried out in the U.S. and low cost countries including India, Indonesia and Taiwan. In countries where Coach does not have a walk-in store it will use freestanding retail stations in places like Mexico, Australia and the United Arab Emirates.
The widespread system that Coach uses to get its latest fashions on the shoulders of customers helps the company limit expenses by creating a mixture of cost and manufacturing capabilities.
Coach's sales rose 28% to $2.6 billion in fiscal year 2007 driven by direct to customer sales at its retail stores in the U.S. and Japan. Coach's operating margin increased nearly 3% over the prior year to 38%.
Value investors often search for undervalued stocks with a price-to-earnings growth ratio below 1. Coach has a PEG of 0.78. (Learn how this simple calculation can help you determine a stock's earnings potential, in our related article PEG Ratio Nails Down Value Stocks.)
Coach competes directly with European luxury brands including Dooney & Bourke and Louis Vuitton Moët Hennessey (OTC:LVMHF). Other competitors including Macy's (NYSE:M), Dillard's (NYSE:DDT), and Nordstrom (NYSE:JWN). All of these high-end department stores sell their own private labels merchandise right beside Coach bags and accessories.
Record of International Success
Coach first expanded into Japan in 2001 and by the end of 2007 it sales from there represented 18% of revenue. The company is now targeting China and opened eight new stores opening in mainland China last year. Future plans for expansion are aimed at India. The company's stock price has been dragged down with the rest of the market in response to rising energy prices and falling consumer confidence, but Coach's brand recognition and customer loyalty could lead to a brighter future.