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Sell Block: Coach Gets Sprung

Thursday, 8 May 2008 | 6:39 PM ET

With an economy in turmoil, gas prices at all-time highs and a consumer seemingly unwilling to spend, it’s pretty easy to swallow the “retail is dead” narrative that’s repeated in the media on a daily basis.

But it’s not entirely true, Cramer said.

Mad Money Sell Block
Mad Money's Jim Cramer tells you which stocks you ought to be selling right now, either to take profits or to cut your losses.

At least not when it comes to Coach . This is a stock that Cramer, by his own account, inexcusably put in the Sell Block by believing that very notion that retail, especially high-end, is in the midst of a grave downturn. But closer inspection shows that Coach is a company firing on all cylinders – expanding, innovating and growing sales even as the critics continue to ring the death knell of the high-end retail complex.

How could Cramer get this stock so wrong? For starters, he listened to the media. A lot of hype surrounded a supposed inventory glut that was hurting Coach’s ability to get its luxury handbags and accessories off its shelves. But after doing a little homework, Cramer realized that the company’s inventory has stayed steady and the whole thing ended up being a non-issue.

He should have trusted CEO Lew Frankfort when he said on Mad Money that a bad quarter was a one time thing and promised that he would deliver. If you’d listened to him, you would’ve caught a double in the stock.

With the inventory non-issue out of the way, Cramer thinks Coach’s numbers speak for themselves. The company is growing sales and earnings per share at a 19% clip – not bad considering the environment – and is trading at 15 times next year’s earnings, or “criminally cheap,” as Cramer put it.

And as Coach continues to increase distribution in its key markets, North America and Japan, it is quietly raising brand awareness in China, where Cramer sees hoards of newly minted capitalists falling all over themselves for a new Coach bag to show off their wealth. Frankfort has even said he expects business in China to grow “extremely rapidly.”

The stimulus rebates, extremely low Wall Street expectations and a solid buyback add to this story, too. Cramer admits he was wrong to imprison Coach in the Sell Block. Now it’s time to spring this stock and start buying again, he said.


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