Coach (COH) reported earnings this morning and while analysts lauded the numbers as beating consensus and commented on 22 straight quarters of earnings growth, an interesting thing happened… The stock didn’t go up. In fact, it dropped over 5% on the third highest volume day this year. Personally I put much more credence in what the market says over any analyst no matter how talented or what credentials he has.
The last time I mentioned Coach, I mentioned that there was a good chance the brand mystique could be wearing off as the company opened new stores rapidly and had a line of bags selling for less than $400 (what a deal – ehm). The final quarter (fiscal year ends in June) did little to convince me otherwise as the company reported factory store sales (read discount outlet stores) rose 31.2% while normal full price retail sales were only up 11.6%. The company is making headway in its indirect sales which are basically sales from department stores, but if Coach is available in all department stores doesn’t that do a little to cheapen the brand too?
An analyst asked about the possibility of cannibalization from factory stores and got an emphatic “NO” from management. The company claims to have done rigorous tests to determine that factory sales are not harming full price sales in any way, but later in the call management noted that many customers prefer to wait until a brand becomes available in the factory stores rather than pay up for it right away when it is first offered in normal stores. I take this to mean Mrs. Smith may love the handbag when she sees it in the retail store, but knows she can get a better deal if she waits. Mrs. Smith’s gain becomes Coach’s loss as 1) it likely pushes the sale to a later quarter or reporting period, and 2) causes the sale to be at a discounted price.
Analysts also commented they were disappointed to see the company had not repurchased shares. Coach has a great balance sheet with plenty of cash and investments. Capital expenditures for the next year look to be well within the company’s ability, but my main concern still revolves around selling luxury products at a split price. A difficult market environment could spell trouble for the consumer and in turn, Coach. I would avoid the shares and am excited to see if I can make a decent return on my short position.
FD: Author has a short position in COH
Coach Inc. (COH)
August 1st, 2007 at 10:58 pm
I happen to disagree with your comments.
People who buy Coach will buy the products where its convenient not based on price.
They have been around since 1941. The brand is as strong as ever. The margins were down slightly.
We agree to disagree.
I disagreed with most on CROX and I continue to be rewarded handsomely.
Thanks.
August 1st, 2007 at 11:12 pm
yeah crox. the numbers and metrics on crox vastly exceed coach, under armor, true religion, and other consumer product growth similiars.
August 1st, 2007 at 11:14 pm
caution on the Coach shorting. the dip is already $10 and the Coach beta is lower, so how much more do you expect it to slide? it certainly isnt going to fall apart. the dip buyers are probably swarming the bid to get in.
August 2nd, 2007 at 1:33 am
Well done on CROX. Congratulations and I hope you continue to rack up great gains. I’ll keep a close eye and your comments in mind on COH. Its definitely true that many of their clients will not care about price, but they will care about image. If they see the same bag they bought this spring carried by someone with a much lower “social status” (and i’m not endorsing this attitude obviously), they may be less likely to purchase at COH in the future. Only time will tell and I’ll be disciplined enough to be long gone if the stock rallies and I am proved wrong.
Thanks for the comments guys!
August 2nd, 2007 at 3:22 am
interesting cause i had heard that coach pulled back from the corporate market to preserve the brand from this type of threat. they said they would lose $150 million+ in sales but that the brand will improve. about ?? 2+ months ago.
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