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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Responding To The Bad News On Coach 11 comments
    Jun 20, 2014 3:37 PM

    Coach (NYSE:COH) tanked on the analyst/investor day presentation. My position was long Jan 2016 35 calls and short Aug 2014 52.5 calls. I rolled the Jan 2016 calls down to 30, bought back the 52.5 calls and sold Nov 38 calls.

    Before taking action, I listened to the presentation, or more accurately, viewed the slides and listened to the sections that were of interest to me. I also browsed a few articles and the comment stream here on SA.

    Giving management two years to do the turnaround, the end result might be EPS of $2.50 and a share price of $40, with the market expecting them to grow 7% going forward, in keeping with the segment of the luxury goods market they are in. I got the 7% from the presentation, that's what they think is out there for the industry through 2018.

    Over the years, management has done a good job creating value, as can be verified by the growth of sales, EPS, shareholder's equity, etc. Closing 20% of stores, and doing what they have to do to bring down inventory, update the store format, and appeal to a younger demographic, improvement can be expected. Management has the financial resources and the determination to take strong action to address the problems.

    It's possible they won't be able to restore the lost cachet, or to retain the existing customer base while transitioning to a look that will be more current. The brand has been cheapened by excessive flash sales and it will take a while for corrective action to restore perceptions. I think it's more likely they will succeed than not.

    In the meantime, I can earn premium selling calls, and if it goes over $38 in November I will be both surprised and pleased.

    The loss incurred riding the stock down to the current level is a sunk cost. In the meantime, I think I can make money from where it is.

    Disclosure: The author is long COH.

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Comments (11)
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  • neobliviscar
    , contributor
    Comments (190) | Send Message
     
    Tom- I hear you and often agree with you. It was only because one of our inhouse people made me go look and think about things that we shorted at $48 w/ puts selling the $53ish calls to pay for it. Heck of a profitable trade, and we covered wayyyyy too early.

     

    The problem is not the flashy young trendy they were doing for a while, which kinda worked. The problem is the Trashy TJMax or Target grade Cowboy Saddlebag meets Steampunk. They will have 1 to 2 quarters of horrid sales, and asian fashionista clans will scorn them for a few years.

     

    Pull pin and throw grenade. Not pull grenade and through pin. Your rollback to 2016 might be a heck of a trade, but it could be uGlY for a while. Too much risk to reward at this point.

     

    Ne'O
    20 Jun 2014, 03:51 PM Reply Like
  • Clayton Rulli
    , contributor
    Comments (3128) | Send Message
     
    KORS aint no JBL http://seekingalpha.co... Buy KORS instead buddy!
    20 Jun 2014, 04:13 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5815) | Send Message
     
    Author’s reply » Clayton & Ne'O, I used to be in the insurance business, and somewhere in there the mindset developed, I am easily attracted by the smell of premium, it overcomes the stench of risk.

     

    So selling the 35 calls and the 38 calls I picked up quite a bit of time premium, hopefully I will get away with it.
    20 Jun 2014, 04:26 PM Reply Like
  • Ray Merola
    , contributor
    Comments (4306) | Send Message
     
    Thanks Tom

     

    I've watched this one for years and never pulled the trigger. Always looks like the shares are "on sale," but then the stock just doesn't show any price action. I suspect another year or so in the doghouse.

     

    Maybe a turnaround is a hand; I'll continue to monitor.
    21 Jun 2014, 08:45 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5815) | Send Message
     
    Author’s reply » Ray, you've done better than I did on this situation. I bought in when it came up on one of my screens, then looked at it and said OK I'll wait until we see how Stuart Vevers makes out trying to get things going again.

     

    I suspect that if I would have watched inventories and compared them to revenues and exerted a little skepticism about a business I don't understand I would be like you, watching from the sidelines.

     

    At this point I'm playing for a little salvage.
    21 Jun 2014, 04:19 PM Reply Like
  • Brendan O'Boyle
    , contributor
    Comments (1208) | Send Message
     
    Started a position with an average price of ~$36.35. I've passed for a while, but I think it's finally cheap enough to justify a position.

     

    But Tom, you really have a two year $2.50 EPS target? The TTM EPS is $3.29. A successful turnaround should get the stock back to $55ish without too much trouble.

     

    Kinda like INTC below $20, collect the divvy and wait for a turnaround, at these prices the risk is lower than you think looking at a chart.
    21 Jun 2014, 04:07 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5815) | Send Message
     
    Author’s reply » Brendan, it looks like you don't like INTC as much as I do. I was calling for $35 when it was at $24, and it's treated me well, so I took some profits but I'm still long.

     

    COH I have demoted in my mind from investment grade to speculation. I like to do a certain amount of speculative trades, catch the falling knife and so on, for COH I'm looking for the stock to stabilize a few bucks above where it is, in which case I will take my salvage and go on to the next thing.
    21 Jun 2014, 04:12 PM Reply Like
  • Brendan O'Boyle
    , contributor
    Comments (1208) | Send Message
     
    I just think Intel was cheap for a reason and is now more or less fairly valued. There isn't much growth in the PC business and I don't have much perspective on how to gauge their chances in mobile.

     

    As for speculative trades, I've never found them to be very profitable. I think COH is just as likely to go down as up in the short-term, so making any money there is simply a coin flip. I've committed either 2/3 or 1/2 of the capital I'm willing to risk here so I'm fine with seeing lower prices and averaging down a bit. Probably if it gets to 33 I'll buy another batch and perhaps one more at 30 if I'm still feeling adventurous by then.

     

    I think longer term Coach has good growth overseas and once the US market stabilizes things will be fine. So I anticipate they will get back to $3.50 in earnings and once this happens the market will assign a 15-17x multiple. So from $35ish the stock should be back to $55 within a couple years, which is 30% annualized with the dividend.

     

    A lot of what got me into this was remembering buying Tiffany around 50 bucks, but I sold out way way too early. Here it seems that I'm buying way too early and things are starting to look worse than I thought.
    21 Jun 2014, 06:17 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5815) | Send Message
     
    Author’s reply » I'm having a little trouble talking myself up to $3.50 EPS in two (or several) years. Management has been talking about how they were "underinvesting," which would refer to advertising as well as depreciation on physical assets such as stores. The point being they didn't update the stores timely. They also have an inventory overhang which needs to be reduced, at the expense of margins. I question the sustainability of current margins, or the company's ability to return to them once the smoke clears.

     

    KORS runs similar margins, so the competition is not on price. It's on margin. KATE has trivial margins, but over the years revenue there has declined. I read that they are getting rid of their low margin businesses so it's hard to use them as a comparable.

     

    KORS runs a similar advertising expense ratio, about 2% of sales last year. Apparently advertising at that level is effective.

     

    Suppose we say $3.00 EPS after two years, with 7% growth leading to a PE of 17. That would get you 20% a year in capital appreciation, to which you could add the dividend.
    22 Jun 2014, 10:04 AM Reply Like
  • Brendan O'Boyle
    , contributor
    Comments (1208) | Send Message
     
    Yes but closing underperforming stores should be accretive to margins in the long-term, no?

     

    I think this is the common panic that occurs when a growth stock hits its limit and becomes a slow-grower. In Coach's case it is more painful than usual because they over-expanded and now need to cut back. Growth at any price doesn't create shareholder value, but I think it allowed managment to kick the can for a little while and pretend the growth story was still in tact.

     

    I also think that trivial changes in EPS or margin aren't really what influences the stock price. The essential thing is that both stabilize and begin to move in the right direction. Once that happens you can rally back to $55 just because investors are now discounting an outcome that is worse than slow-growth.

     

    I'm considering playing with my position with an option strategy - buying $35 calls in equal proportion to the stock I already own and selling two $38 calls. That way I can double down for a bounce without putting more on the table for now.
    23 Jun 2014, 09:05 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5815) | Send Message
     
    Author’s reply » I've had some success with vertical call spreads on falling dagger type situations, what you're doing would capture the easy part of the bounce, if it happens.
    27 Jun 2014, 10:45 AM Reply Like
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