WOW, Coach Could be Dumped on Earnings Day

On June 4, I came out positive on shares of Coach (link: http://www.thestreet.com/video/11565235/coach-vs-kors-battle-of-the-bags.html). I did not follow two golden investing rules I have (and often reference on Twitter @BrianSozzi) developed for myself, and dang, that's really upsetting. The stock is down 3% since that call, not a disaster, but not a profitable undertaking. So which two principles did I fail to adhere to? Here you go… •A stock is only cheap in a pressured broader market if there is a strong, fundamental tailwind to future earnings that could shock the market. I surmised that Coach's men's business and change to its factory store pricing model were positives being ignored by the market. In reality, they were priced into the stock, what was not were an accumulation of under the radar negatives on Coach, which present risk to consensus estimates. •Placing too much emphasis on historical trading multiples. The fact is the key attribute that is underpinning Coach's hearty valuation relative to the market and mall-based specialty retailers is the growth potential of the China business. China data surprised to the downside in the second quarter, and comments from retailers intra-quarter on the country were not inspiring. Having completely reset my brain on Coach, I am holding off on recommending the stock as a pre-earnings position for the trading oriented portfolio I manage for Decoding Wall St. (www.decodingwallst.com). Is Coach comparable to a Starbucks (SBUX), Chipotle (CMG) and Buffalo Wild Wings (BWLD), where sales and earnings growth don't leave the market impressed (and stocks are sold) given the underlying valuation on the company? Or, is Coach a relative of Panera (PNRA) and Amazon (AMZN), where so-so to awful reports and guidance are embraced on still richly valued companies? I prefer not to stick around to find out, and here is why… There is no positive surprise factor tomorrow. I characterize a large increase in the dividend (Coach raised it by 33% on 3Q12 release) or announcement of a new share repurchase plan as surprises worth playing on a company's earnings day. I believe Coach will want to wait until post-holiday to enact such actions in light of current company trends (decelerating comp trends, for example) and macro trends. The sell-side has not marked down their earnings estimates, broadly speaking. Those analysts that have appear to still bake in optimism on China, holidays and the just launched cross gender Legacy collection as consumer confidence and spending downshifts. Insider notes: (1) 4Q12 at risk for an earnings miss amid sub 6% comps (guidance is for “at least” 6.7%; trends at department stores and specialty retailers suggest otherwise) and expenses being more than “slightly” ahead of sales growth from below plan sales and investments in newly acquired international businesses; (2) there could be rising concern on market share losses as Coach's March quarter sales only grew in line with category growth (pattern change…hello Michael Kors as a competitor); (3) the dynamics of retail comps have swung to a greater number of transactions from transaction value, and that ratchets up the risk for the P&L; and (4) China performance interestingly shifted in 3Q12 from higher comps as the main driver to distribution taking the lead, which creates lower quality sales and will cause the market to worry about demand trends by mainland Chinese.