The Short Case on Coach

It always sparks my interest when a company which has been around for years announces the “first annual” anything. Such is the case with the “Coach Inc. first annual investor and analyst meeting” which was held in NYC late last week. While I was not in attendance (my invitation was lost in the mail), it sounds like the company put on a first class show complete with lofty projections for the remainder of the decade, and a sneak peak at new holiday products expected to drive much of the growth in Q4.

Coach Inc. (COH) which I profiled back in June and again after the earnings announcement in early August, makes the well known handbags and other leather accessories that have become very popular over the last decade. It strikes me as odd that management would wait until the company had been public for nearly seven years to host their first annual investors and analyst meeting. It seems to me that this is a “rah rah - drum up support” type of meeting as managers may have begun to feel waning interest from wall street and the general investing public. While Coach has enjoyed its day in the sun for quite some time, It appears reality may be catching up to the stock which could pose problems for executives and investors alike.

Management laid out their expectations for the next few years, expecting earnings to double over the next four years. The company believes they can open at least 500 stores in the US total (current count is 259) and sees most of their growth coming from international markets - specifically Japan and China. There were plenty of statistics outlined which showed the company performing better than managements expectations which begs the question of whether the company really is growing better than could be expected, or if management is purposefully guiding low in order to beat their own conservative guidance (a popular strategy across many industries). Yet with all this excitement surrounding the increased guidance, the stock dropped 6% from Thursday’s close to the intraday low on Monday. It appears despite analyst upgrades, the market was a bit unimpressed with the presentation.

An astute investor may point out that there was has been a negative market the last few months and COH is likely to trade in tandem with that market. This is true, but it also bears noting that the weak market was due to a declining economic picture, specifically a disappointing jobs report. If we enter a more difficult economic time, which appears to be happening, COH will have a very difficult time reaching their sales and earnings goals. While many luxury brands will hold up despite economic strain, COH is considered an “aspirational and accessible luxury brand.” This means the bulk of their clients are middle class to upper middle class consumers who are much more effected by economic swings. This group of consumers will likely cut luxury goods out of their budget if times become more difficult.

It is this concern that currently has me short shares of COH and I will continue to watch the overall economic picture as my tell on how COH should trade into the end of the year. I would approach the name with caution and consider hedging or trading out of the position if long.

Full Disclosure: Author has short position in COH

COH Notes

Comments

[borisb]

Zack you keep dumping on Coach but its already dipped $12 to $13..