Coach Inc. tries to draw the line on discounting (its stock)

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In a Wal-Mart-type economy, many investors now view Coach Inc.’s shares as a luxury they can’t afford. So the company has opted to be its own best big spender.

The maker and retailer of high-end leather goods, which shelled out $1 billion buying back stock over the last nine months, today said its board authorized another $1-billion buyback program.

At this rate, Coach is spending well more than its annual net income to take shares off the market. The New York company earned $783 million in the fiscal year ended June 28 on sales of $3.2 billion.

Coach was one of Wall Street’s brightest stars from 2001 through mid-2007, but its stock has been hammered recently as investors have grown more worried about the outlook for consumer spending. The shares are down 27% since May 1, compared with a 10% drop for the Standard & Poor’s 500 index.

The stock fell $1.93, or 6.8%, to $26.40 today before the buyback announcement, then edged up to $27 after hours.

Buybacks can help cushion a company’s share price in falling markets by providing a source of demand. But whether they’re a good long-term use of corporate dollars depends in part on whether the company is sacrificing spending on other things -- say, research and development, or expansion plans -- to support the stock.

Coach CEO Lew Frankfort today said the new buyback program was a way to increase value to shareholders (the usual line) and to offset new shares the company may issue for employee compensation plans. In a statement, he said the company’s ‘strong financial condition’ and ‘excellent long-term outlook’ gave Coach the wherewithal to spend billions on the stock.

But the near-term outlook is foggier. Coach’s net operating income was up 20% in the quarter ended June 28, but Frankfort told analysts on a conference call last month that ‘the consumer remains reluctant to purchase.’ He said fiscal 2009 would be an ‘investment year’ for the company, marked by aggressive expansion in China.

By one measure, Coach’s shares look like they’re in the bargain bin: With the stock down 50% from its 2007 peak, its price-to-earnings ratio is about 11 based on analysts’ average per-share earnings estimate for the current fiscal year.

At the other end of the retail spectrum, the rally in shares of Wal-Mart Stores Inc. this year has pushed that stock’s P/E ratio to nearly 17.