The punchline for us is that we’d short more Coach on strength following the quarter. It’s not that we’re trying to find the bad in this event to justify our call – we don’t do that. But very simply that nothing has really changed except the price – and even that is coming back down to earth after giving back most of initial gains.
Quantitatively, the stock needs to break $58.81 and hold that level for bulls to have anything meaningful to hold on to from a near-term perspective, but the fundamentals won’t support that. The stock initially traded like this was a blow out quarter. In reality, revenue was in-line, margins were down -209bps, EPS grew at a whopping 5%, and inventory growth outpaced sales by 5pts. Guidance – whatever little Coach gives – was very much unchanged, and there was not a whole lot of new information on the call. We’d be surprised if consensus operating estimates change meaningfully following this print.
There were a few notable call outs from where we sit.
- The first is that the new (high cost) Legacy product line is ‘off to a good start’, meaning that the chance of it falling flat on its face is minimized. This is important because it’s Coach’s biggest product launch in years, and it is spending accordingly. If the product line did not catch on, it would be a disaster for Coach. They can’t declare victory yet. But they can check the box that it was not a failure. Positive
- They could have really muddied the water with their new reporting structure, but did not. The door was wide open for them to add an element of opacity to mask the real underlying trend in their business, but that did not materialize. Positive
- While they averted a negative development with perception of disclosure, the reality is that guidance remains very slim. The ‘trust me’ factor remains high and it’s not good enough for us that they’re simply buying the stock. Negative
- While comps came in at a respectable +5.5% in NA, the company is slowing store growth on the margin from 30 to 25 stores. Negative
- Coach’s SIGMA looks ‘putrid’. This is the 10th quarter in a row where inv/sales has been in a bad space, or headed towards one. The margin move looks awful, and the compares over next 3 quarters get tougher. Tough margin compares with higher inventories is never a great set-up. Bulls will point to the fact that COH bought it its Korea and Malaysia distributor in the quarter which caused the margin erosion and inventory hit. That’s acceptable, but it does not change the fact that more product needs to be sold at the best margin possible to comp last year’s trend. Negative
Apparently, a low quality 2-cent beat on in-line revenues and weak gross margins with elevated SG&A was good enough to get the stock up in this morning’s session. But the reality for us is that revenue is still slowing, and the cost of those sales is going higher. COH looks cheap ‘relative to history’ where it is today. But valuation is not a catalyst.
It’s guiding to 31% operating margins today. As it grows into more spaces outside the traditional core, margins are more likely to come down than go up. Mind you, 31% is exceptional. Even if they came all the way down to 25% that would still be exceptional by any standards in retail. But unfortunately, stocks don’t go up when margins come down.