Coach is another Rule #1 company by Big 5 standards. There are only a few reds and yellows in its 10-year history, and they occurred within the past 2 years, during the Great Recession. It is entirely forgivable. Looking at the 5-year and 9-year averages, it's all green and growth is pretty astounding. It also has no debt at all. After looking at RIM, Apple, and now Coach, you're starting to get the idea of what a Rule #1 company looks like...a sea of green.
As I have mentioned above, everyone seems to love Coach. Its products are priced nicely such that they are affordable by the masses, but expensive enough to make for awesome margin for the company. I don't think Coach has much of a competitor. If you go to Yahoo Finance, you can see who its competitors are. The three listed are all private companies: Dooney & Bourke, Kate Spade, and Michael Kors. I will confess...I'm not a fashion expert...but aside from Michael Kors, I have not heard of the other two companies. This alone tells you that at least the females of my family do not really particularly like these brands. I checked out the websites of these companies and I must admit, Kate Spade has some pretty nice handbags, too. But the story is similar to the Coke-Pepsi story. Pepsi may have the better tasting drink, but Coke has the brand moat. So, Coach definitely has the brand moat that can give it the upper hand.
Coach's sticker price is calculated as $50.40, which means the entry price is $25.20. With the stock price currently at $55.90, the stock is too expensive for us even to start considering! It is a slightly overpriced stock. If we were to crank up the growth rate to 20%, the entry price is still only $38.57. If we had ran this in the summer, the stock would have been in the mid $30s and it may have been a good buying opportunity. But since then, Coach has had a good quarter and the stock has skyrocketed from $33 to $55.90 in less than 4 months!
The payback time for Coach is 9.8 years, when calculated using a 15% growth rate. It's close to the upper limit of 10 years. Coupled with its slightly elevated stock price, I would not recommend stockpiling this stock at its current price.
Therefore, Coach gets a score of 4 for Margin of Safety.
Yahoo Finance shows that Frankfort owns 2.7 million shares of Coach. That's about $150 million! If I had to make a hunch, I would probably bet that Frankfort has some interest in running the company well, because if the stock drops to $30, his fortune would shrink to $81 million. Another vote from me.
Frankfort recently sold about a million shares of company stock in November. As I mentioned, the stock had a huge run up in the last few months. So, I don't blame Frankfort for pocketing some profits. He's probably not a stupid investor either. He knows, just as we do, that Coach's share price is probably a little overpriced now. So, Frankfort selling his stock does not necessarily make it a bad thing. However, keep your eyes open for any future action. Once Frankfort opens his wallet to buy shares again, you may want in too. If he sells more, then you may want to reconsider.
I think Coach has solid management in Frankfort based on his long and successful history at Coach. His large ownership of company stock is also a plus. Coach gets an 9 for management.
I've tried to dig up some dirt regarding Coach but couldn't find anything substantial. Coach does not manufacture its own products but uses contract manufacturers, mainly in Asia. In its annual report, it does talk about its business practices, that it performs audits of the manufacturers. However, we are not privy to seeing what those standards are exactly. So, even though Coach claims to be a responsible corporate citizen, we don't actually know what that means. But since there are not many complaints found online, I will take that as a good sign.
Now, I'm just going to split hairs. One ethical issue I can think of is the use of leather. As we know, leather comes from cows, and if you're concerned about the killing of cows, then you may want to have a closer look. I remember seeing a documentary in which the treatment of cows, used as a source of leather, was shown. Cows were treated very cruelly when they were brought to be slaughtered. Moreover, in India, where cows are sacred, manufacturers would engage in unethical purchase of cows from poor families. I don't know if these apply to the manufacturers used by Coach, but it would not be outrageous to assume that they probably do in some cases, maybe unknowingly.
I think Coach is likely an ethical company. I would not have too much trouble putting my money in this company. Its products improve the lives of our beloved wives, mothers, sisters, girlfriends, and in turn, that improves our lives. Coach gets a score of 8 for meaning.