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Coach (COH) is one of those rare stocks that keeps delivering. Every time you think it's over for them, Coach comes through. The company had yet another strong earnings report yesterday. Of course, given their prices, it's hard to see how they're not making a lot of money.

For the fourth quarter, Coach earned 61 cents a share, which topped Wall Street's estimates by three cents a share. Sales grew by 29%. The company also raised its FY 2007 earnings forecast by eight cents to $1.71 a share.

Coach has been one of the big success stories of this decade. The company had its IPO in October 2000 at $16 a share. Since then, the stock has split 2-for-1 three times, which means that the IPO price was just $2 a share. So the stock is up more than 2,000% in a little over six years.

Now Business Week wonders if Coach is becoming too popular:

Retail investors remember how Calvin Klein and Tommy Hilfiger lost the shine on their images when they flooded the discount market. Image is clearly an issue among upscale brands. Tiffany's (TIF), for instance, decided to increase the price on its hugely popular silver jewelry items, fearing that huge sales will tarnish its upscale image. Coach, of course, is known for quality craftsmanship and lately high design. In recent years, it has also introduced purses that are more affordable and priced under $200, and even under $100 in its factory outlets. These steps have clearly attracted a new set of middle-income buyers who previously didn't shop at Coach, and some fear the brand might lose its cachet if its reach extends too far. "There's always the danger of overextending yourself," says Passikoff.

Of course, so far Coach has proved many naysayers wrong and been on an unprecedented growth path. Patricia Pao, founder of New York retail consultancy The Pao Principle, believes that Coach will not falter in its expansion plans because the company's moves are market research-driven, well planned, and well executed. "They really know the game of building a brand, creating customer experience, and introducing goods that keep customers coming into the store on a daily or weekly basis," Pao says.

By the way, this BW article follows one of the most common formulas in business writing. Introduce your straw man ("Coach can do no wrong!"). Add in some criticisms that can apply to almost anything ("yeah...but, remember the Gap"). Then restate a watered-down version of your initial hypothesis as your conclusion.

Investor's Business Daily had a better take. They noted that this was the first quarter in the company's history where gross margins declined, although operating magins increased:

Overall, analysts said, Coach's high-end success fits in with the bigger market picture. Early returns indicate that luxury retailers such as Tiffany, Nordstrom and Saks all had happy holidays.

Coach is in an interesting position. Although $700 may seem like a lot for a purse, it all depends on where you're coming from.

"Even their really expensive bags are a bargain compared to the competition," said Chen, who owns Coach shares. "I know it sounds absurd, because I remember the '90s, when spending $500 on a bag was spending a lot of money. Now, if you're not spending at least a grand, it's not spending a lot of money. That is the perception in the fashion world."

Coach executives seem to agree, because they steadily have expanded what they consider to be the addressable market. In Tuesday's conference call, CEO Lew Frankfort remarked that when the firm went public in October 2000, they expected to max out at 250 stores. Now they're gunning for 400.

Here's IBD's chart of Coach's earnings growth:

Posted by edelfenbein at January 24, 2007 10:16 AM