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Stock Strategist

A Luxury Bag at a Bargain

Coach's fiscal first-quarter sales and earnings reflect an on-track brand relaunch; shares are still below fair value.

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 Coach (COH) has developed a narrow economic moat through a brand that enables pricing, sourcing, and distribution advantages, and capital efficiency. Despite the company's recent struggles, it is still creating economic profits, and at a level greater than most retailers. The firm's first-quarter 2015 earnings report shows financial results in line with guidance and suggests that plans for transformation are well underway and tracking to management's road map. As such, we see no reason to change our $45 fair value estimate or our moat rating, though we continue to believe the execution of the plans will take time and involve risk.

Although the first products designed by Stuart Vevers, Coach's creative director, just hit full-priced stores in September, management said it was pleased with the performance and added that items priced over $400, all-leather products, and novel styles performed best. The overall tone of the comments was mixed, though, as the company said that given the large reduction in promotions the success of new products was too little to move the needle on the overall results. Management also said that it was too early to tell, alluding to positive signs and positive comps over $400, but saying visibility was difficult with the shift in promotions. Since our focus is on the long term and the value of the brand, although perhaps the market was looking for more positive commentary, we believe the price and design elevation are positives and fashion changes often can be slow to catch on with the public.

Paul Swinand does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.