Coach is the Real Retail 'Tell' Stock

Aug.29.07 | About: Coach, Inc. (COH)

Many are citing the deteriorating retail numbers as a tell on the economy, with Walmart (NYSE:WMT) in particular as an indicator. I'd like to use Coach (NYSE:COH) as my tell.

This luxury retailer has been a wonderful stock that I've traded a few times over the past few years, but in truth just buying and holding this stock would have been the better play many times.

Since its summer lows in 2006 in the mid $20s, the stock had risen to the mid $50s as recently as late April. Then a slow and steady decline has ensued.

When I started my fund in early August, I put a tiny stake in Coach as my only retail play, but then quickly sold out at $44. I mentioned then:

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 it and I found competing sites!)

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.

Even in this recent rebound the stock never bounced back to reach its 200 day moving average of $46, and its 50 day moving average is about to cross over ($46.50) the 200 day... the "death cross" discussed yesterday - bearish. Stock opened $45 yesterday and now down to $41.50. It spiked down to this level on the market washouts in mid August ($41) - but looks poised to go lower this time. If it does, what is it 'telling' us?

As an aside, there is a gap in the chart in Oct. '06 north of $36. If the market continues to wash out, this level appears more likely by the day. If I could short in this fund, this is a name I'd be short - despite the long term play here and the international expansion opportunities. Coach will be a good buy again someday - but from cheaper levels, in my opinion.

Disclosure: No position