Coach (COH) Buyers Remain Loyal

I can’t tell you how many stories I’ve read over the past year about how American’s are tightening their belts and refraining from extravagant purchases.  Perhaps the highest profile story of this type was the Time magazine cover piece describing the changing habits of the consumer as “The New Frugality.”  The article argued that the economic meltdown of 2008-2009 now has permanently altered our spending habits.  

Now, while it’s true that many people are more price-conscious when it comes to what they spend on various items, it’s also true that a good portion of upper-middle-class-and-above consumers haven’t shed their appetites for the finer things in life.

One company catering to this upper-middle-class-and-above demographic is Coach (COH).  The handbag, wallet, luggage and assorted luxury accessories maker has tremendous global appeal, and that appeal seems to be growing.  Ask any fashion-conscious female what they think of Coach handbags and you are liable to first see a big grin, followed by either an admission of ownership and/or the desire to add another Coach bag to her current collection.

Now, in the interest of full disclosure, I will admit to you that my fashion-conscious wife is the owner of multiple Coach bags.  And despite the recession, the Coach purchases haven’t gone on hiatus in our household.

But Coach’s management isn’t relying on customers like me who’ll buy their products regardless of the economic milieu.  In fact, the company reacted in a very shrewd manner to the new frugal zeitgeist.  Coach cut prices on many of its products earlier this year, and did so without sacrificing quality, and while maintaining their 70%-plus gross margins.

The company also introduced the Poppy collection, a new line of slightly lower-priced handbags and accessories.  The introduction of this fashionable, yet affordable line, of Coach products prompted Bank of America-Merrill Lynch analysts to upgrade COH shares to “Buy” from “Neutral.”  The move gives Coach the ability to keep benefiting from loyal, high-end consumers, while also benefiting from customers who are focused on acquiring their new affordable items.  It is, indeed, the best of all possible worlds for a luxury goods producer.

Another key driver going forward is surging demand for Coach products in China.  The new and exponentially growing Chinese middle class has a serious addiction to luxury goods.  My friend and resident China expert Robert Hsu recently visited both mainland China and Hong Kong, and he told me about the near frenzy of luxury goods buyers he saw in Hong Kong’s high-end retail stores.  

Many of these buyers he saw didn’t blink an eye while purchasing multiple high-priced luxury handbags.  According to Hsu, it’s the explosion of the new entrepreneur class in China, with their voracious craving for luxury items, such as handbags, which will continue driving demand for luxury goods producers like Coach.

I think the Coach story is a slam dunk for investors here, so if you want to dress up your portfolio, bet on the bag.

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