Coach (COH) Continues to Break Down

I actually had a very small long position in Coach (COH) for a few early days in August; but starting in mid August I went negative on this company.

I decided to sell it today after thinking about the situation further. While the stock has been a favorite of mine over the past year, I think the coming housing troubles will hurt even their spectrum of customer. While the VERY high end (north of Tiffany's and Coach, think Hamptons) is doing incredibly well, and to now the next level of US population has been doing well, much of the target audience of Coach in the US could certainly be affected by this slowing in housing.

Coach is a bit of a status symbol, and something many people in mid/upper class suburbia buy. The problem is many people in suburbia are overextended on their $600,000 home bought with 0% down interest only loans. This does not mean they they don't have good credit; it just means they are very leveraged.

In late August, I wrote Coach is the true retail tell

The core customer of Walmart is more of the discount shopper already strained by the hikes in gas, energy, and now grocery prices.... whereas the core shopper of Coach is the suburbia soccer mom who loves her trinkets.

So with this subset of consumer being the main subset buying $450K homes in northern VA, $600K homes in southern CA, $800K homes in northern CA, $400K homes in AZ/NV - many with little down and some scary initial 2 year teaser terms, I am watching Coach to see how it performs. To me, it's a great tell.

The stock rebounded into the September Fed decision and actually peaked in the misguided notion that Fed cuts will fix everything - while the retail stocks reflect this as a myth the rest of the market has yet to react to the myth. However, Coach is now down 18% from that peak valuation 3 weeks ago and now is approaching mid August lows in the $41s range. While this should provide some support and at least a temporarily reprieve/bounce; if the stock breaks here we are probably looking at mid $30s.

Now Coach does have the wildcard in its corner that the aspirational Chinese consumer loves brand names and Coach has an enormous potential market there - but the weakness in the stock is striking in that even with that wonderful opportunity (that seems to buoy any other stock which even has a whiff of Chinese exposure) investors are fleeing Coach in droves as its 2 major markets, US and Japan (for different reasons) are lacking the level of growth needed to dive this stock. I remain a long term bull on this name, but certainly remain bearish near term.

Again I cannot short individual names, but I still think many believe the retail/restaurant sector is in a 1-2 quarter slump and back we will go with the ever reliable American consumer. Unless, the Fed keeps cutting (which I am confidant it will), and 2 year ARMs become all the rage again, and consumers can recapitalize their credit card debt back into the house ATM (the ones still not upside down on their house that is), I just don't see soccer moms able to repeat this trick of the past half decade anytime soon. Not when their grocery bills are suddenly up 20% from a year ago. Not that there is any inflation out there, per the government, but I'm just saying *if* there were inflation and it was not imaginary....

Now I imagine on the next Fed cut, most likely on Halloween, this stock will bounce back as the NEXT 25-50 basis points will surely save the consumer... right? Of course (not). But we will hear the trumpets blaring, the unicorns romping, the rainbows over head (and helicopters next to them) about how all is well with the consumer again - with these stocks bouncing back upward ... creating new shorting opportunities in my book.

No positions