Wednesday, 22 January 2014

Coach - sharp intake of breath

Once again it looks as if the Coach share price will open up in US trading today below the US$50 level.  Over the last three years there have been six or seven times when the share has fallen to the sub US$50 level...and every time at least a trading opportunity has resulted. 

As Seeking Alpha noted, the reason for the pre-market fall was weaker-than-expected numbers driven by the North America business:

Coach, Inc. (COH): Q2 EPS of $1.06 misses by $0.05.

Revenue of $1.42B (-5.3% Y/Y) misses by $70M.

Coach (COH) reports sales fell during its FQ2 as it experienced weakness in its women bags and accessories business in North America.

Revenue breakdown: North America -9% to $983M; International +2% to $425M.

The retailer saw strong growth in China during the period with comparable sales growing at a double-digit clip during the period.

A shocking 13.6% drop in Coach's (COH) comparable store sales in North America is hard to reconcile with a luxury category that showed some resiliency during the period, note analysts.

After the last quarterly update in October, I wrote the numbers up (link here) and noted that:

'Clearly to be optimistic about the shares you have to believe that the company will turn the US around via not only a better performance in women's handbags, but also ensuring a continued broadening of sales.  A key influence on this, over time, should be the appointment of a new Creative Director Stuart Vevers'

The results of Mr Vevers' efforts should be seen at the New York fashion week in February, with the first sales in stores coming in the Autumn.  It clearly can't come quickly enough despite 'strong growth' in footwear and men's sales and the noted good international sales as North America sales remain two-thirds of the businesses revenues. 

As noted before in October, the company is fortunate that it has no debt.  Extrapolating the Q2 operating income of US$436m puts the company on a sub x8 EV/ebit ratio but with the company guiding down FY margin hopes these numbers will move around.  Still, the company is on a single digit EV/ebit ratio and they continue to buy back shares:

'The company also announced that during the second fiscal quarter, it repurchased and retired about 3.3 million shares of its common stock at an average cost of $52.99, spending a total of $175 million and taking the year-to-date total to $350 million. At the end of the period, approximately $1.0 billion remained under the company’s current repurchase authorization'.

That US$1bn remaining under the current repurchase authorisation is equivalent to around 7% of the market cap.  The company should put these monies to work now in buying back stock if they believe in the business (which I assume they do).

Sentiment has turned on Coach from ugly to almost hostile.  Buying the stock now is based on a hope that 2014 will see the start of a fashion-led turnaround, combined with some supportive financial engineering angles (the buyback) and continued solid progress in international markets, especially in Asia. 

Sometimes when it feels horrible the best decisions are made especially when the company has an attractive static valuation, a strong balance sheet and is buying back shares. 

I am going to be following the company's share price in the market today with great interest. 

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