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.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for Coach are strong. This is very important for a company that is suddenly highly affected by economic headwinds. A strong balance sheet, as well as $2.10 billion in cash flow, will buy Coach a lot of time. However, that doesn’t mean the stock price is safe. Coach might want to reward shareholders with the cash available in order to keep investors interested.

Debt-To-Equity

Cash

Long-Term Debt

COH

0.01

$858.66 Million

$22.71 Million

KORS

0.01

$312.24 Million

$11.62 Billion

VRA

0.21

$4.47 Million

$35.37 Million

 

T = Technicals on the Stock Chart Are Weak

Over a three-year time frame, Coach has performed well. It outperformed Vera Bradley (NASDAQ:VRA) by a wide margin. However, Michael Kors has stolen the spotlight since bursting onto the scene. Coach does have a 1.90 percent yield whereas neither competitor listed below pays a dividend.

1 Month

Year-To-Date

1 Year

3 Year

COH

-10.76%

-7.44%

-23.04%

57.77%

KORS

5.10%

10.33%

90.85%

1.20%

VRA

-4.49%

-2.59%

-29.13%

3.08%

 

At $50.75, Coach is currently trading below all its averages.      

50-Day SMA

57.18

100-Day SMA

57.16

200-Day SMA

60.18

 

E = Earnings Have Been Steady

One thing you can’t take away from Coach is that it’s a highly profitable company that has a history of reporting annual earnings and revenue growth.

2008

2009

2010

2011

2012

Revenue ($)in billions

3.18

3.23

3.61

4.16

4.76

Diluted EPS ($)

2.17

1.91

2.33

2.92

3.53

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue ($)in billions

1.45

1.11

1.16

1.16

1.50

Diluted EPS ($)

1.18

0.77

0.85

0.77

1.23

 

T = Trends Do Not Support the Industry

It wasn’t long ago that high-income individuals were spending at will, which had a lot to do with investments that paid off handsomely. Many of these investments were made at or near the bottom of the financial crisis. More recently, profits have been taken, and there isn’t nearly as much upside potential. Therefore, fewer investments are being made. Another factor is middle-income earners who aren’t choosing to splurge anymore — they’re more budget-conscious.

Conclusion

Coach is a solid company that should be around for a long time to come. That said, this doesn’t look to be the best time to invest in the company. Discretionary income isn’t nearly as abundant as it used to be, growth has slowed, and management has no game plan.

Coach is a STAY AWAY.

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