Coach (COH) with Interesting Report

Coach (COH) is a name I always like to watch as a "tell" on the upper middle income US consumer in our conspicuous consumption culture - it is sort of in the same pan as Harley Davidson, speedboats, and Whole Foods (WFMI) - luxuries we don't need but we love our toys/excesses. I went negative on it last summer [Aug 15: Sold Small Position in Coach], and it fallen a long way since and I was curious how the market would react to its earnings today. I wrote last August:

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. So it's a risk.

I expanded on this later in the month [Aug 28: Coach as the True Retail Tell]

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.

You can see it has been pretty much been downhill since then...the stock is back down to $30 after a 7% fall this AM



So today, despite a beat on earnings and solid guidance the stock is weak on what appears to be margin concerns (probably needing to discount merchandise to keep it moving) But unlike the banks and homebuilders who have been going up no matter what bad news they report, it is interesting to note this name falling on what I would consider not so bad news.

• Coach Inc., the largest U.S. luxury leather goods seller, said Tuesday its quarterly profit rose 8.3%, helped by strength both in the U.S. and abroad.
• Net income for the fiscal third quarter rose to $162.4 million, or 46 cents a share, from $150 million, or 40 cents, a year earlier. Sales rose 19% to $744.5 million.
  
• Profit met the average estimate of analysts, while sales exceeded their average forecast of $730.9 million, according to FactSet.
• Gross margins, however, missed some analysts' estimates. Gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 75% from 77.8%, affected mostly by the sharp rise of the yen over the period and by the continued promotional environment and channel mix, Coach said.
• Coach said it's "prudent" to wait until its fourth quarter to give guidance for the coming year because of uncertainty in the economic backdrop. Coach is conducting a review of ways in which its brand relates to the consumer to help lessen the impact of a slowing economy.

Again it is more about the reaction to the news, than the news itself. The reaction is a bit troubling; frankly I am surprised in this "see no evil, hear no evil" market of late that the stock is being punished like this - I thought "bad news is great news!" was the current mantra. This is a quality company but it is operating in a tough neighborhood. Without as many of the "aspirational" American housewives able to pay for it's bags and/or fleeing to its outlet centers instead of mainline stores, the company will continue to struggle. As I have predicted, many retailers will begin to pull back from all forecasting for the year as the true economy shows in their numbers, as opposed to the multinationals whose foreign sales are masking domestic weakness. All their current 2008 guidance is fiction, and this will be proven true by December 2008. So they are not "cheap", despite what CNBC says. That does not mean they won't rally from time to time, especially when those rebate checks hit, Q3 GDP is artificially boosted, and the seals across financial media will clap their hands in glee. Then we'll go back to normal and/or wait for the next round of rebate checks to be sent to keep America spending over and above their means.

Coach remains a great tell on the American consumer who has been spending well over and above their means and now is being battered by reality, inflation, and lack of access to house ATM. Oh well. They still have China to conquer... no need to cater to Americans in about 5-10 years as wealth creation moves overseas....

No position