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Coach Revisted

|Includes: Tapestry, Inc. (TPR)

 So what’s going with Coach? First trading week has not been kind for this stock. Coach, along with the rest of consumer discretionary, has enjoyed a spectacular 2010, and now I am unsure about the fate of this sector for for 2011. Coach’s 1 year performance - 40.92% compared to SPDR Consumer Discretionary XLY - 24.01% and SPDR S&P 500 SPY - 11.34%. Since it’s the new year, we are once again starting at 0. Has my investment thesis played out or was I just dead wrong but dead lucky?

I was betting on a recovery in consumption, and Coach is a nice affordable luxury class that’s best in class. So Investment Thesis revisited: Never disrespect a woman’s need for another bag! Aside from that Coach stands to benefit from growing international and domestic popularity. That paired with a great merchant like Lew Frankfurt at the helm that has been making the right move by lower price point, expand collections, and consolidate non-performing stores. This is and has been a solid company in and out of the downturn. So far, this thesis still holds, especially the international piece. But Why worried?
Bottom line on retail:
Investment thesis on retail was over wrong or played out. retail in 2010 had been on a path of recovery. quarter after quarter of same store blowout had been the result of recovery and NOT robust sustainable growth. we were recovering from an 09 bottom that was so deep, that it made retail look like its on a growth path.

Current environment for retail is as such:
*technology and advanced inventory really made a different in push productivity to the historical peak.
*sustainability of margin comes into question. any additional expansion on operating profit margin needs to be closely scrutinized.
*collapse in margin could potentially come from inflationary pressure from commodity prices.
*any miss step from inventory management, product placement, mis-pricing --> That Margin will get squeezed!

So the outlook for 2011 is...going to be a bumpy ride for sure, at least up until the dog days of summer in my opinion. A possible play on Coach could be buy an Aug put option at 50 strike financed with a 65 strike call. I still believe that Coach has good upside in the long term, and this is a good way to protect youself against some key uncertainty in the nearterm.