Coach is the Real Retail 'Tell' Stock

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

Comments

[Amit Chokshi]

I agree with you, I also believe some former high fliers are going to phase into the long-period of valuation compression like WMT and HD did over the past decade. COH is a great company but I think like SBUX the market may re-assess whether these companies deserve premium valuation multiples. I also think DSW is a good candidate as well but I was scared out of shorting it unfortunately.

[Dan]

COH as a "tell" is obfuscated by the fact that they are growing their customer base expanding downward to the middle class by opening up stores in outlet malls, selling items via the Rack, etc. As a brand, it is mainstream. The rich(er) will move on. A better barometer of middle upper class spending can be found via BMWs, TIF, LVHM, WFMI sales in North America.

[TraderMark]

Dan, I agree there is some dilution by the outlet mall stores, but I believe their Chairman/CEO has stated that they try to keep the outlets something like 70 miles away from normal stores, to avoid this as much as possible. I still believe its caters to many of this target group but your list of names is also a great list; also I would add RL (look at the 4-5 week stock performance, north of 100 down to low/mid 70s). WFMI is sort of hard to use as a tell simply due to the mess surrounding the Wild Oats aquisition and the stock has been in a fall for a year now due to slowing growth and entry into its turf by traditional grocers. TIF, LVHM, BMW can agree on those.

Amit, I like COH in the long(er) run due to their inevitable cache and expansion into China. COH is huge in Japan and many luxury brands are booming due to their new exposure in China. Chinese seem to love brands. SBUX is only staying afloat in terms of valuation due to this international expansion but coffee/food is a lot harder to transcend borders than a pretty purse. ;) But not enough sales are ex-Japan or US to help them in the near term. COH will probably be a great buying opportunity sometime here in 6-18 months in my opinion for the Chinese middle/upper class consumer play.