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COH: Still the Same Questions

Nine trading sessions have passed since Coach reported its 2Q results and nothing from a fundamental perspective has changed in our view.  What has changed is Keith's perspective on the shares, which were once again added to the firm's virtual portfolio on the short side. 

 

Here's a recap of our thoughts (questions) following the handbag maker's recent report:

 

On an absolute basis, Coach’s F2Q was a pretty good quarter.  The topline was better than expected (NA comps up 12.6% vs. a whisper of 8-9%) and quarterly EBIT margins of 35.9% by all accounts remain tops across the entire apparel, retail, and luxury sectors.  Growth clearly remains the top priority for management with square footage expected to increase by 10% (vs. 8% LY) driven by aggressive expansion in China, new moves into Europe, and modest growth in the US supported by a resurgent men’s initiative.  Cash generation is also a strong point as it always has been.  The company ended the quarter having repurchased $388 million worth of stock, with $940 million on its balance sheet and no debt. 

 

The “growth” story and the cash are hallmarks of Coach and factors that certainly shouldn’t be ignored.  However good this may be, we come away from the quarter with more questions than answers on two fronts. First, is the Street really prepared for extremely challenging gross margin hurdles over the next three quarters after barely printing a gross margin gain of 15bps on an easy LY compare? And secondly, if SG&A growth remains high to support the company’s growth initiatives, will be there be meaningful earnings leverage in the near-term to satisfy those that are accustomed to consistent upside? Couple these unanswered questions with the fact that inventories ended the quarter up 36%, a full 17 points higher than sales growth and we believe there may be more risk than reward in the near term.  While the SIGMA chart is not a perfect predictor by any means, this pattern is turning out to be a classic setup for future downside.

 

COH: Still the Same Questions - coh 2q


European Bank Swaps Fall

Position: Long Sweden (EWD); Short Italy (EWI), and Euro (FXE)

 

Below we include a portion of a product offering from our Financials’ team, the Weekly Risk Monitor for Financials, that tracks CDS across global banks. The table below covers major banks throughout Europe and the trend week-over-week was down, with a mean move of -18bps or -5.4%.  As a follow-up to a post we wrote on Sweden on 2/2 titled “Buying Swedish Fish”, Swedish banks maintain their relatively low risk premium, a further positive indicator of present strength and additional confirmation that fears associated with their past leverage to the Baltic states are rearview.

 

Spain, on the other hand, and despite a positive (downward) move in CDS week-over-week, remains on our screens due to the uncertainty in the size and timing of the government’s bid to capitalize (or convert) its lenders.

 

You’ll remember that late last month Spain’s government set a September 2011 deadline for lenders to raise their core capital ratios to 8% (or 10% for the cajas, or savings banks).  Finance Minister Elena Salgado said that Spanish banks require no more than €20 Billion of extra capital to meet these targets, however Moody’s estimated the number as high as €89 Billion. Although the country has a bank-rescue fund, known as FROB, there’s still much uncertainty about the absolute value in funding needed and the ability of the lenders, especially the cajas, to raise debt in the market.

 

Matthew Hedrick

Analyst

 

European Bank Swaps Fall - bank1

European Bank Swaps Fall - bank2


MACAU FEBRUARY UPDATE

We wouldn’t read too much into the first week’s numbers but they are not good.

 

 

The week before and the first few days of Chinese New Year (CNY) are usually slow.  We are hearing that overall market hold percentage may have been low and it certainly was at Wynn and MGM (possibly below 1% at both).  Macau was very crowded on Saturday and Sunday and that is likely to continue.  The strong CNY-related VIP play likely began in earnest on Sunday, which is not included in these numbers.

 

Our concern is that some analysts/investors may be expecting close to a HK$20bn month while we think HK$17-18bn is more likely even with strong CNY volumes this week.  MPEL continues to have the most upside relative to expectations, in our opinion.  Wynn’s market share should bounce back nicely.  We are hearing their numbers were extremely strong the last two days.

 

MACAU FEBRUARY UPDATE - table1


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

MACAU FEBRUARY UPDATE

We wouldn’t read too much into the first week’s numbers but they are not good.

 

 

The week before and the first few days of Chinese New Year (CNY) are usually slow.  We are hearing that overall market hold percentage may have been low and it certainly was at Wynn and MGM (possibly below 1% at both).  Macau was very crowded on Saturday and Sunday and that is likely to continue.  The strong CNY-related VIP play likely began in earnest on Sunday, which is not included in these numbers.

 

Our concern is that some analysts/investors may be expecting close to a HK$20bn month while we think HK$17-18bn is more likely even with strong CNY volumes this week.  MPEL continues to have the most upside relative to expectations, in our opinion.  Wynn’s market share should bounce back nicely.  We are hearing their numbers were extremely strong the last two days.

 

MACAU FEBRUARY UPDATE - table1




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