COH: Coming Clean That Model Is Unsustainable

Takeaway: COH's Sales growth and 30%+ Margin model can no longer coexist. This won’t be the last ‘investment year’, which creates a value trap.

  • Coach is hardly flying in on the wings of glory with its 2Q13 results and a $1.23 print versus consensus of $1.29. No surprises here, as this is in-line with our model, and has been on our short list for a while given our concerns over the levels of spending needed to maintain market share. But the question to ask here is whether this miss is an event to buy into, or one to press. Our sense is that it is the latter.


  • Our rationale is that we’re hearing Coach talk about the promotional cadence and competitive landscape for the first time in – well, ever. Ever is a long time. We get it that China and Men both represent sizable opportunities, but the US Handbag market is one that represents 70% of Coach’s business. If it can’t grow profitably, then nor can Coach.


  • The reality is that when we see a miss like this – for the reasons we’re seeing – it is usually not the last miss. We think that it’s more likely than not that COH is locked in a multi-year period where it grows its top line at the expense of a draw-down in EBIT margin, or it holds margins steady with top line remaining stagnant. We’d bet on the former.


  • Either way, it suggests that FY13 is not the last ‘investment year’ that Coach will see. We think that value investors risk getting stuck in a value trap on this one. This name is cheap, built to stay that way, and lacking earnings growth to move the stock higher.



COH: Coming Clean That Model Is Unsustainable - COH S



    Morning Reads From Our Sector Heads

    Note: Each morning we'll post what stories Hedgeye's various sector heads and analysts are reading. 


    Josh Steiner (Financials):


    -Bank security study highlights vulnerabilities


    -Morgan Stanley’s Pay Later Plan


    Todd Jordan (GLL):


    -Wenzhou Bad Loan Ratio Declines, Ending 17-Month Rising Streak


    Kevin Kaiser (Energy):




    -Baker Hughes Announces Fourth Quarter and Annual Results


    Howard Penney (Restaurants):


    -Taco Bell provides sneak peak of Super Bowl commercial


    New Haven, CT  (January 23, 2013) – Hedgeye Risk Management, a leading independent financial research and media company, just closed a round of financing representing the first time the company has taken on outside capital. Investors in this round include high net worth individuals and 500 Startups, a Silicon Valley based seed fund and startup accelerator. Though Hedgeye did not disclose the amount of money raised, the company did say that it will deploy the capital as part of a broader media-focused strategy for the company.


    “As the media landscape changes dramatically and as alternative types of media like Twitter emerge, Hedgeye is uniquely positioned to capitalize on this trend,” says Hedgeye CEO and Founder Keith McCullough. “Our plans are bold and aggressive when it comes to media, and we wouldn’t have it any other way.”


    “"I've always been a fan of no-BS analysis, and Hedgeye helps even Wall Street idiots like me tell the difference between bulls and bears." says Dave McClure, Founding Partner of 500 Startups.


    Hedgeye sees a generational opportunity in both financial services and media with a focus on proprietary content generated by the more than two dozen research analysts at the firm.  Hedgeye already produces video, audio and text-based products across multiple platforms, and plans to build on that success.




    Hedgeye Risk Management is a leading independent financial research and media company.  Focused on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world’s most regarded research analysts – united around a vision of independent, un-compromised real-time investment research as a service.  Hedgeye Media produces a wide variety of audio, video and written content that is proprietary and essential, and is distributed globally across multiple platforms. Hedgeye also provides content and analysis for major media outlets including Fortune Magazine and CNBC television. Visit<> for more information.

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    TODAY’S S&P 500 SET-UP – January 23, 2013

    As we look at today's setup for the S&P 500, the range is 21 points or 1.18% downside to 1475 and 0.23% upside to 1496.        















    • YIELD CURVE: 1.60 from 1.60
    • VIX  closed at 12.43 1 day percent change of -0.24%

    MACRO DATA POINTS (Bloomberg Estimates):

    • 7am: MBA Mortgage Applications (prior 15.2%)
    • 7:45am: ICSC/Goldman weekly sales
    • 8:55am: Johnson/Redbook weekly sales
    • 9am: FHFA House Price Index MoM Nov. est. 0.7% (prior 0.5%)
    • 9:45am: Revision of Chicago Purchasing Managers Index
    • 10am: IMF releases World Economic Outlook update
    • 11am: U.S. to purchase $1.25b-$1.75b notes
    • 11:30am: U.S. to sell $30b 4-week bills
    • 4:30pm: API energy inventories


      • IMF issues update to 2013 World Economic Outlook, 10am
      • Congressional Gun Violence Prevention Task Force holds
      • meeting, 1pm
      • Sec. of State Clinton testifies on Benghazi before Senate
      • Foreign Relations, 9am; House Foreign Affairs, 2pm
      • ITC scheduled to announce decision to uphold/review a trade
      • judge’s finding that Samsung infringed on 4 Apple patents, 5pm


    • Apple reports earnings after close; 47.8m iPhones expected
    • Allergan to buy Map Pharma for $958 million in cash
    • Google profit tops ests. on year-end advertising gains
    • IBM 2013 EPS beats estimates as software boosts profit
    • Texas Instruments forecasts sales that miss some estimates
    • McDonald’s qtr global comp sales may drop; first since 2003
    • Siemens profit beats estimates on energy, health-care units
    • Unilever sales growth beats estimates on emerging markets
    • Draghi says ‘Darkest Clouds’ over euro area have lifted
    • Netanyahu vows broad coalition as Lapid surprises in vote
    • U.K.’s Cameron promises to hold referendum on EU by 2017
    • U.S. budget discord is top threat to global economy: poll
    • Microsoft said to weigh Dell investment in buyout
    • World Economic Forum in Davos continues


      • Wellpoint (WLP) 6:00am, $0.94
      • Air Products & Chemicals (APD) 6:00am, $1.29
      • Baker Hughes (BHI) 6:00am, $0.61
      • TE Connectivity (TEL) 6:00am, $0.64
      • Praxair (PX) 6:05am, $1.38
      • Textron (TXT) 6:30am, $0.56
      • Quest Diagnostics (DGX) 6:30am, $1.04
      • Coach (COH) 7:00am, $1.29
      • Motorola Solutions (MSI) 7:00am, $1.02
      • United Technologies (UTX) 7:00am, $1.03
      • RPC (RES) 7:15am, $0.25
      • Rollins (ROL) 7:30am, $0.17
      • First Niagara Financial (FNFG) 7:30am, $0.18
      • Molex (MOLX) 7:30am, $0.39
      • St Jude Medical (STJ) 7:30am, $0.89
      • Allegheny Technologies (ATI) 7:35am, $0.15
      • Abbott Laboratories (ABT) 7:44am, $0.46
      • McDonald’s (MCD) 7:58am, $1.33
      • US Airways Group (LCC) 8:00am, $0.19
      • General Dynamics (GD) Pre-Mkt, $1.89
      • Texas Capital Bancshares (TCBI) 4:00pm, $0.83
      • Bancorp South (BXS) 4:00pm, $0.24
      • RLI (RLI) 4:00pm, $0.45
      • Swift Transportation (SWFT) 4:00pm, $0.26
      • Cubist Pharmaceuticals (CBST) 4:00pm, $0.48
      • Stryker (SYK) 4:00pm, $1.13
      • Varian Medical Systems (VAR) 4:00pm, $0.87
      • Greenhill & Co (GHL) 4:01pm, $0.72
      • Amgen (AMGN) 4:01pm, $1.38
      • Crown Castle International (CCI) 4:01pm, $0.13
      • LSI (LSI) 4:01pm, $0.14
      • Hexcel (HXL) 4:03pm, $0.38
      • Umpqua Holdings (UMPQ) 4:05pm, $0.23
      • InvenSense (INVN) 4:05pm, $0.17
      • Polycom (PLCM) 4:05pm, $0.15
      • F5 Networks (FFIV) 4:05pm, $1.15
      • Netflix (NFLX) 4:05pm, $(0.13)
      • SanDisk (SNDK) 4:05pm, $0.75
      • Symantec (SYMC) 4:05pm, $0.38
      • Lam Research (LRCX) 4:05pm, $0.44
      • United Rentals (URI) 4:15pm, $1.05
      • Altera (ALTR) 4:15pm, $0.39
      • Western Digital (WDC) 4:15pm, $1.82
      • Raymond James (RJF) 4:19pm, $0.67
      • Cathay General Bancorp (CATY) 4:30pm, $0.33
      • Cohen & Steers (CNS) 4:30pm, $0.42
      • Susquehanna Bancshares (SUSQ) 4:30pm, $0.23
      • Apple (AAPL) 4:30pm, $13.56
      • FNB /PA (FNB) 4:35pm, $0.21
      • East West Bancorp (EWBC) 4:45pm, $0.48
      • Hill-Rom Holdings (HRC) 5:00pm, $0.44
      • Noble (NE) 5:00pm, $0.67
      • Parametric Technology (PMTC) 5:25pm, $0.33
      • Teradyne (TER) 6:00pm, $0.01
      • Jacobs Engineering (JEC) Late PM, $0.75



    OIL – Both Brent and WTIC have re-captured their respective long-term TAIL risk lines of $92.04 and $111.48 support. There’s as important a difference b/t global growth slowing and stabilizing as there is stabilizing and accelerating – and it’s real tough to see consumption accelerate if food/oil prices reflate (from here); something to noodle over w/ Energy (XLE) +6.7% YTD.

    • Gold Near One-Month High Before Lawmakers Vote on Debt Ceiling
    • Leon Black Follows Denham in Buyout Firm Mine Push: Commodities
    • Physical Gold Purchases Seen by Standard Bank as Unusually High
    • Copper Trades Near One-Week High Before U.S. Debt-Ceiling Vote
    • Oil Trades Near Four-Month High Before Vote on U.S. Debt Ceiling
    • Soybeans Gain as Brazil Dryness May Cut Crop Amid Rising Demand
    • Rice Exports From Thailand Drop to Decade Low, Losing Top Spot
    • Cocoa Swings as Ivory Coast’s Crop Spared Damage; Coffee Gains
    • Galena Energy Hedge Fund Chief Lixi Said to Leave Company
    • Algeria Attack No Outlier as Oil Targeted 3 Times a Week: Energy
    • Chile Billionaires Propel CSAV to First From Worst: Freight
    • Traders Plan Gasoline, Diesel Freight Swaps as U.S. Drives Rally
    • Rubber Drops for Third Day as Delayed Stimulus May Curb Demand
    • Rebar Futures Rise for Second Day on Optimism Demand to Improve








    RUSSIA - +0.8% leads European majors this morning and is more of the same on the reflation point. Treasury Bond Yields don’t like Oil ripping either, down a few bps d/d to 1.84%. Always interesting to study macro moves on the margin.





    KOSPI – a leading indicator in our model works both ways and its interesting that the KOSPI (down -0.81% last night) just broke my immediate-term TRADE line (1985) out of nowhere (despite “Tech” news being solid after the US close). Nikkei punishing the Johnny come lately consensus crowd who came into the short Yen/long Nikkei trade late, down -2.1% through 10,733 TRADE support.








    The Hedgeye Macro Team




    Melvin's Market

    “What if this is as good as is gets?”

    -Melvin Udall


    That’s what Jack Nicholson asked a bunch of depressed psychiatric patients in one of the great scenes in American comedy (As Good As It Gets, 1997). Melvin Udall should be re-casted as a modern day money manager.


    Obsessive-compulsive about this market, anyone?


    Back to the Global Macro Grind


    I don’t yet require psychiatric help, but with each passing day I am feeling more and more like a shrink. “Keith, do you really think growth is stabilizing?”… “This market can’t go higher with all this debt, can it?”…


    Trust me, it goes on and on and on. I don’t get up at this hour every day to not tell you what I think. The last 2 months have been nothing short of fantastic for stocks – and, this time, the global growth fundamentals actually supported it.


    Everything has a time and price. So the question remains, with the SP500 up double digits (+10.2%) now from where you could have bought just about anything lower (November 15th, 2012), is this as good as it gets?


    Let’s start with Global Growth… “I’ve got a really great compliment for you, and it’s true.” –Melvin

    1. ASIA – high frequency growth data has been stabilizing for 3 months
    2. EUROPE – high frequency growth data stopped slowing in November
    3. USA – employment growth has been stabilizing for 3 months and Housing is ripping

    What about inflation?

    1. ASIA – most CPI and PPI readings were relatively benign in October-December, but should pop up in January
    2. EUROPE  - since they are still dealing with stagflation, it’s all relative, but Brent Oil was cheaper in November
    3. USA – follow the CRB Index - down hard from SEP to NOV, heading higher, faster, now in January = #headwind

    So, if policy perpetuated Inflation Slows Growth… and Food/Energy prices continue higher from here until whenever that whenever is, you have yourself the 1st major macro headwind to growth in the last 2-3 months.


    If you think you are going to get sustainable (real inflation adjusted) economic growth with $115-130 Brent Oil, you might want to check the tapes on how that consumption growth movie ends.


    Isn’t it appropriate and ironic, then, as our bailed-out overlords descend upon Davos this week, that the manic media no longer looks to broken sources for “growth forecasts.” They’ve enlisted JP Morgan’s Jaime Dimon this morning instead. He doesn’t have a macro model but is insinuating that the “foundation is set for 4% growth.”


    Right, right…


    To be clear, there’s a better chance that hockey is banned in Thunder Bay, Ontario than the USA seeing a sustained 4% GDP growth rate when Oil is above $100/barrel.


    To Review: there are 3 stages of growth and inflation in our GIP (Growth/Inflation/Policy) Macro Economic Model:

    1. Slowing
    2. Stabilizing
    3. Accelerating

    You don’t have to be a brain surgeon to get Muckernomics – it’s all about time and space. Try it on skates (or with a car) and you’ll get it. Cycles are processes, not points. And there are certain levels of inflation that slow growth inasmuch as there are others that help stabilize it (see our Chart of The Day).


    Accepting this as truth would eviscerate the academic credentials of most Keynesians hanging out on your tax-payer dollars in Switzerland this week. Central planners of the Global Currency War still think that if you debauch the Dollar, you’ll see a meteoric rise in export demand (even though exports are only 9% of the US economy, and falling).


    Back to Melvin’s Market… higher-highs (and in the case of the Russell2000, all-time highs) are flat out bullish, until they aren’t. If your catalyst shorting this market was Earnings Season, so far that’s what we call being wrong. The Financials led off with borderline excellent results, and now we’re seeing Tech (the market’s worst performer YTD at +2.15%) deliver some early morning bacon.


    Since Apple (AAPL) is 17% of Tech (as a % of the Tech ETF, XLK), what it does tomorrow on earnings day really matters; especially after Google (GOOG) and IBM ripped last night in the post. Our quantitative signal on AAPL says to do nothing. It’s still in a Bearish Formation (bearish on all 3 of our risk management durations, TRADE/TREND/TAIL), so waiting and watching for the print is a choice.


    In the meantime, the SP500 is immediate-term TRADE overbought at 1496 inasmuch as the VIX is oversold at 12.19. So a big AAPL surprise to the upside might just give you what Melvin called his last word, “freak” – to the upside. And if they miss, people might just freak-out on that too.


    If you think this market is crazy, join the club. There hasn’t been anything normal about this for years. Not seeing growth stabilizing when it did might be as crazy as buying is on green is crazy today or tomorrow.


    Sell crazy someplace else, we're all stocked up here.” –Melvin Udall.


    Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST10yr Yield, AAPL, and the SP500 are now $1, $110.93-112.95 (Bullish Breakout for Oil), $79.41-80.14, $1.32-1.34, 87.71-90.61, 1.82-1.91%, $482-528, and 1, respectively.


    Best of luck out there today,



    Keith R. McCullough
    Chief Executive Officer


    Melvin's Market - Chart of the Day


    Melvin's Market - Virtual Portfolio