Is Coach’s Stock Only for Bagholders?

With shares of Coach (NYSE:COH) trading at around $50.75, is COH an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

On the surface, Coach seems to be a good news/bad news situation, but we will dig a little deeper further along in this article. In the meantime, let’s focus on the basics. As you might already know, Q4 sales were up 4 percent year-over-year. This is the good news. The bad news is that it was the slowest rate of growth since 2008. Q4 EPS came in at $1.23 versus $1.18 for the same quarter one year ago. That’s also good news. But the expectation was for $1.28 — more bad news. Q4 revenue came in at $1.50 billion, which is higher than the $1.45 billion that we saw for Q4 one year ago, but revenue still didn’t meet expectations.

North America saw weak performance as sales were only up 1 percent. International sales were up 12 percent, and China sales were up 40 percent. The international division performed much better than the North America division, but it still won’t be enough to show significant overall growth in the near future.

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Investors didn’t digest the earnings news well. The stock dropped 15.4 percent yesterday. Not unexpectedly, Coach attributed its poor performance to disappointing holiday sales. This has been a common trend throughout the retail sector. Coach also blamed a poor economy, merchandise promotion, and stiff competition. In regards to the latter, Michael Kors Holdings Limited (NYSE:KORS) is stealing market share on a daily basis.

Coach is in a bind because it’s a high-end retailer that is unable to cut prices too far. If the company cuts prices substantially, then the brand loses its appeal. At the same time, fewer people are willing to pay high prices due to economic conditions. To make matters worse, management hasn’t signaled any strategy change to deal with current conditions. This is a terrible sign. Avoiding a problem that is likely to continue is not an effective strategy.

Let’s take a look at some important numbers for Coach.

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