Tuesday, January 25, 2011

Coach (COH) - Good Earnings but Market not Interested

Following up on yesterday's short Coach (COH) call, the company put out a fairly impressive earnings report this morning, but the market is having one none of it.  It is very important to watch when the market fails to react to good news - think foreshadowing.   As I stated a few weeks ago, so many stocks have had such enormous runs, the propensity for selloffs on news is far greater than a normal earnings period.   Longer term I do continue to like this stock as the aspirational customer - especially of China - becomes an increasing part of the business, and the U.S. upper end consumer is supported by The Bernank.   If you are investing in United States retail, over a 5+ year horizon you have to keep in mind the accelerating bifurcation of American society.  One wants to be focused on the top end affluent retailers (as more wealth is concentrated in the upper end), OR the low end where many more Americans are migrating as their jobs are moved overseas and they take lower paying replacements... or none at all.
  • Luxury sales in the U.S. surged 6.7% in the 50 days before Christmas, according to MasterCard Advisors’ SpendingPulse. 

But shorter term, I outlined my reasoning yesterday for trade set ups to the dark side due to the technical condition.  On a fundamental basis some of the cost pressures we saw in 2008 also will begin to bear fruit due to The Bernank. This morning's action is only reinforcing those thoughts.

As for earnings, the company beat by 3 cents but based on the parabolic run since October - that was already baked in.  Gross margins also weakened, which is always a concern.
  • Gross margins missed estimates, coming in at 72.4% compared with expectations of 73.2%.

Via Reuters:

  • Coach Inc (COH) reported a larger-than-expected quarterly profit as U.S. luxury spending rebounded over the holiday season, but the company faces pressure from rising leather costs.
  • Coach Chief Executive Lew Frankfort told Reuters that a higher percentage of shoppers visiting Coach stores made purchases over the holidays, and that handbags up and down its price spectrum had sold well.  But Frankfort told Reuters that Coach is "feeling inflationary pressures" from rising labor costs overseas and leather prices. Coach's gross margin rate, which gauges how profitable its products are, held steady at 72.4 percent.  Frankfort said Coach was diversifying where it makes its products and experimenting with different types of materials to contend with those rising costs. 
  • He added that consumers were still being cautious, despite the improving economy.  "The consumer is gaining confidence that economy is recovering though they are being judicious," Frankfort said in an interview.  (don't worry Frank, at Dow 40,000 due to QE7 all caution will be thrown to the wind)   The best-selling handbag worldwide during the holiday quarter was one that can cost as much as $598.
  • Coach has positioned itself in the "affordable luxury" segment in the past two years as shoppers have cut back on the most expensive items. It has lowered average prices on its handbags about 10 percent by introducing new, more affordable lines and expanding its outlet stores. But it also never cut prices in its stores during the recession and has never had to wean shoppers off of bargains.
  • Sales rose 18.7 percent to $1.26 billion, fueled by a 12.6 percent increase at stores open at least a year in North America, which account for 70 percent of the company's business.  Coach, best known for its high-end handbags and wallets, reported net income of $303.4 million, or $1 per share, for the second quarter that ended Jan. 1, up 26 percent from $240.9 million, or 75 cents per share, a year earlier.
  • In China, where Coach is still new to the market, but now operates 52 stores, sales rose by double digits on a percentage basis. Sales there make up less than 5 percent companywide, but Frankfort said that would rise to 10 percent by 2014.

There is a large multi year stock buyback authorization to boot (as always, authorization is not the same as actually doing it)
  • Coach said its board had authorized the repurchase of up to $1.5 billion of its outstanding common stock.  Coach has until June 30, 2013, to complete the stock repurchase. That would amount to about 28.1 million shares, equal to about 9.5 percent of the stock outstanding.
No position

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