Your Earnings Season Preview: Coach

| About: Tapestry, Inc. (TPR)
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Past Performance: Coach (COH) has only missed one EPS expectation in the past four years. The troubling part is that miss came just last quarter. EPS growth has been consistent year over year, but recently slowed. EPS growth in the actual fourth quarter slowed from over 10% YOY from 2010 to 2011 Q4 to just over 5% growth from 2011 to 2012.

That fact is even more troubling when EPS growth is expected to be 13.6% over the next three to five years. Coach has long term support at the $46.90 level over a five year view. The technicals of COH are showing the stock is oversold currently, with strong support again at $46.90 and resistance at $61.00. Technicals only tell a small portion of the story though.

Fundamentals: Coach trades with a current P/E of 13.72, a forward P/E of 12.01, a P/S of 2.86, and a PEG ratio of 0.98. Compare those metrics to the consumer goods sector and the S&P 500 average. The consumer goods sector trades with a current P/E of 20.6 and a forward P/E of 19.4. Meanwhile, the S&P 500 average trades with a current P/E of 20.5 and a forward P/E of 17.2. A comparison shows that COH trades to a discount compared to both the consumer goods sector and S&P 500 average.

The PEG ratio hints at Coach being fairly valued at the current price roughly $49 per share. The P/S ratio of 2.86 shows that COH has some serious work to do. With all of the other metrics showing Coach being fairly valued or undervalued, the P/S ratio is what keeps COH from skyrocketing upward. The 2.86 P/S tells the story of how management cut costs drastically, but sales continue to drag.

The Story: The recession and high unemployment have hurt Coach without question. Many experts actually question the business model. The balance sheet continues to improve though. In 2010, Coach had approximately $1.5 billion more in total assets than total liabilities. In 2011, $1.6 billion more in total assets than total liabilities. In 2012, Coach enjoyed nearly $2 billion more in total assets than total liabilities. Over that same time span deferred long term asset charges actually fell by roughly 39%, and the increase in inventories over the last three years only accounts for $140 million of the $500 million asset appreciation differential.

An interest rate hike from the Federal Reserve could actually spur sales in Coach stores. An interest rate hike would encourage more lending from banks, as banks would be inclined to lend more for business expansion. Expanding businesses means more workers and lower unemployment. Lower unemployment means more disposable income for consumers. More disposable income means more big ticket or luxury purchases, which is the category Coach falls into.

How to Play It: Coach will continue to test support in the short term. COH would greatly benefit from higher interest rates from the Federal Reserve. Luxury consumer goods have felt the wrath of the recession nearly as hard as the banking and housing sectors. The difference is that the housing and banking sectors have begun to turn around. With either an interest rate increase or an end to quantitative easing, I would expect Coach to enjoy price appreciation yet again. My personal 52-week price target: $64.00.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in COH over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Always consult with your personal registered financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.