Wednesday, December 19, 2007

Coach (COH) Imploding

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Amazing to watch the deterioration in Coach (COH).... simply astounding for this once market favorite. After a very brief stint on the long side in the first week or two of the fund, I punted this name and went negatve in late August [Coach as the true retail tell]

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. So it's a risk.

So in fact I think this is a lot better tell on the economy than Walmart. 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 (do you know there are even websites now where you can rent a purse, errr... handbag - in fact, I just googled and I also found a competing site.) This speaks to America's obsession with appearances and keeping up with the Joneses. Even when one cannot afford a handbag, one can pretend to show others they can afford it for the evening. 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.

There are a few stocks I really watch very closely just as signals and Coach (COH) is the one I watch for the health of 'aspirational' middle and upper middle income level America. The inability to short individual names is really a drag when you make calls like this and cannot benefit. The chart the past few days truly signals (to me) the foreshadowing of a weak Christmas, outside of Walmart shoppers (where a lot of former Target shoppers probably are fleeing as they become poorer by the month) and electronics (i.e. Best Buy)
  1. (Sep 14) I'm Watching Coach Like a Hawk
  2. (Oct 9) Our Old Friend Coach - Don't Forget Her
  3. (Oct 15) Coach Continues to Break Down
  4. (Oct 23) Coach Down 7% On Earnings

In fact, I like this business long term and once they get into China and reach out to the aspirational middle class there, they should benefit. But for now this is a play on the US and Japanese consumer. Both slow growth economies facing some very large structural problems - and at least in this country with a government unwilling to face them by cutting back spending and not driving the country into subprime status.

As they say a picture is worth a thousand words - if I could short individual names; I'd probably be covering now as I wouldn't be too greedy - that's not to say there is not more downside, but the meat of the move is probably now in the stock. Since late August when I went bearish its down from $45 to $30 today... a nice 33% gain (for shorts that is).

No position but wish I could....

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