The Real Deal on Wall Street: Coach Investors Could be Doused with Gatorade

Accessible luxury retailer Coach COH will announce its holiday quarter earnings shortly, so I wanted to set things up beforehand in typical Real Deal style. One key to being a successful investor is averting disasters in the portfolio by properly fitting pieces of a puzzle (macro plus firm-specific) together ahead of actual news.

As it pertains to Coach, there are three factors that I think have gone overlooked by the market, meaning they are not priced into the stock’s valuation in advance of the important holiday quarter report. First, the holiday season was rampant with discounting that was more irrational than management teams expected at the start, and yes Coach’s products were on markdown in major department stores well in advance of the actual Christmas holiday (red flag).

Second, as Tiffany & Co. TIF warned recently; if its products on the upper-end of the price spectrum didn’t fly from the glass display cases, I wonder how Coach performed with its middle-America reach and stiffer competition (see Michael Kors).

Three is China, a focus by Coach Management, and where I continue to take issue with the company because it just states comparable store sales are rising by “double digit percentages” each quarter. We don’t now the actual number to compare it to peers who have aggressively moved into the country or to stack it up to previous quarterly growth rates, and this is unfortunate.

Although Coach is benefiting from an expansion push into China, I would not be shocked to learn of the slightest bit of growth rate moderation in sales given the macroeconomic signs gained in recent months (such as four months of home price declines). Moreover, Coach is not in the upper crust of luxury retail as is Louis Vuitton and Hermes (which are top gift-giving items for the rising affluent in China), suggesting it would have greater exposure to a slowdown in China’s retail sales.

Coach did have $902 million left under its share repurchase program entering the quarter, and this could buffer the earnings line from any margin softness. However, I am concerned how the market will interpret Coach’s quarter in terms of margins and China, the elevated analyst estimates, and the stock’s valuation. Would hang loose on the sidelines for the time being on this name.