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Coach is being rewarded for 'shrinking to grow,' retail analyst says

  • Coach is "where you want to be in this new norm of retail," Nomura's retail analyst Simeon Siegel tells CNBC.
  • The company reported better-than-expected earnings on Tuesday, sending shares of the stock up more than 11%.
  • The luxury handbag retailer is rumored to be considering acquiring other brands in its peer group.

It's Coach's turn to celebrate, one retail analyst is saying.

"[We've] been hearing vendor after vendor ... say we need to get smaller, but nobody has done it, right?" Nomura Instinet's Simeon Siegel asked on CNBC's 'Power Lunch' Tuesday. "Coach just did it."

The luxury handbag retailer reported better-than-expected profit before the bell Tuesday, fueled largely by the company's efforts to cut back on discounts and promotions in U.S. stores.

Shares of Coach stock at one point climbed more than 11 percent, driven higher as Wall Street digested the earnings results and contemplated the brand's future.

Investors feel there are so few places to "hide out in retail," that signals of strength and measured growth are rewarded meaningfully, Siegel explained. He maintains a buy rating on the stock, with a $40 price target. Shares traded Tuesday hovered around $43 before market close.

"We believe that the rampant conversations around the 'Death of Retail' have bolstered the profile of a small group of companies that have emerged as the structural winners, boosting their valuations to levels previously reserved for growth stocks," Siegel's firm, Nomura, wrote in a recent note to investors.

To this end, a company like Coach is being rewarded on Tuesday, Siegel said.

An important takeaway from Tuesday's earnings report: Coach is one of the only companies today that is successfully "shrinking to grow," Siegel said, referring to how Coach's shuttering of some stores has helped boost profits.

The company has positioned itself "where you want to be in this new norm of retail," the analyst added.

Rumors continue to swirl that Coach is considering buying up more luxury retailers, such as rival Kate Spade or shoe manufacturer Jimmy Choo. This could help the company grow profits even higher, analysts are saying.

On Tuesday, Coach stock was the biggest gainer in the S&P 500 for most of the day.

COH 1-month performance 

Source: FactSet

Read: Coach reports third-quarter earnings

Watch: Coach shares take off after profit news