Coach

2/1/14     

             This week I was asked what I thought about the high-end retailer, Coach (COH).  This was as stock that I wrote about and liked a couple years ago, but a lot has changed since then, not just in the economy, but also with the company and the stock.  Before I look into the fundamentals of any stock, I want to look at the chart and see how the technicals look.  As I’ve said many times before, I believe in strong technicals much more than I do strong fundamentals, but let’s start with the numbers first.  On January 22, Coach reported it’s second straight quarterly miss, with earnings of $1.06/share ($1.11/share was estimated) to $297.4M, a 14% drop YoY.  Revenues also fell 5.6% to $1.42B ($1.48B was expected).  Coach also suffered its second straight quarterly sales decline, with total North American sales dropping 9% to $983M (same-store sales fell 13.6% and direct sales dropped 8%).  Coach cited a slow down in sales for women’s handbag and accessories, due to weaker store traffic and online offers.  Gross margins also declined 300 basis points to 69.2%.  While the quarter was pretty bad on all accounts, there were a couple bright spots.  International sales, which make up about 30% of overall sales, rose 2% to $425M, led by China, which rose 25%. 

Management seems to have acknowledged the fact that they are no longer the dominant player in handbag sales, since Michael Kors has really taken over that title in the last few years, so they have begun the early stages of diversifying by moving more into accessories and clothing, and boosting their exposure to the male population.  But I think that’s where the good news really stops.  They are paying a 2.82% dividend, but even with that yield, Coach has been flat over the last 52 weeks, underperforming the broader market by about 28%.  Looking at recent US economic data (lower consumer spending, weak guidance from top retailers like Macy’s, Amazon, Tiffany’s, etc, and a higher unsold inventory build up), it is not the best time to own retailers that have been underperforming, no matter what you think of the long-term outlook.  With the only sales bright spot coming from Europe last quarter, there will be more hard times to come for Coach.  Emerging markets were a mess in January and will likely remain that way for the short-term, and data out of China in the last 30 days has been anything but stellar. 

                  The fundamentals do not point to Coach being a stock that’s going higher, but what does the chart say?  Whether you look at this stock on a daily, weekly or monthly basis, the chart looks disastrous.  Coach closed Friday at $47.89, just $2.12 (5%) above a 4-year low.  Last earnings report created a 2.5% gap down between $49.88-$52.01, which will certainly act as resistance on the way back up.  Coach is down about 15% YTD on higher than average volume, 3X lower than the Dow.  But the $47.50 level is the one to keep a close eye on.  The last two times Coach traded that low, it rallied 50% and 20% before falling back down.  I don’t think it does the same thing this time.  Those rallies came in 2011 (beginning of this bull market) and the first few months of 2013, when everything rallied 20%.  Since mid July, Coach has been range bound, trading between $45-$60.  If the stock breaks down below the $45 level, the next area of support is around $43, which would be about a 12% drop from Friday’s close.  The path of least resistance for Coach is to head lower, which is where I think the stock is headed.  The momentum is to the downside, with the stock trading lower 4 straight weeks.  While, if you buy the stock on Monday, using the 4-year low as your stop loss, you’re only risking 5%, I don’t see a reason the stock will trade much higher than $50.  That gives you a risk/reward of 5% both way, which isn’t worth it.  I like to say that the stock wouldn’t be down here if it were any good, and I believe that.  There are better places in retail to put your money to work, including Coach’s red-hot competitor, Michael Kors, which is trading just about 5% off all-time highs, and has consistently blown away analyst expectations.  While not in the high-end category, my favorite retailers are still Macy’s and even Amazon, despite it’s recent earnings miss. 

                  The bottom line is that Coach can be bought with a real tight stop, but the upside potential isn’t bright enough for me to take the risk.  The retail sector has been the worst performer in January dropping 10%, more than 3X the S&P 500.  The absolute best trades are ones where market tone, fundamentals and technicals are all pointing in the same direction.  In the case of Coach, all three are pointing lower.  I think you stay away from Coach until it can trade above $52 (the level it traded at before it’s last earnings call), and if you want to be in a retail name, stick with Macy’s.     

My current positions: Long Ford (F), Toll Brothers (TOL), Gilead Sciences (GILD), SunPower Corporation (SPWR), Starbucks (SBUX), Anadarko Petroleum (APC), Visa (V), Apple (AAPL), short SUGAR, long GOLD, long 10-YEAR TREASURIES.

Jeff Lewison