You Should Relax with the Coach Hype Playaz

Looking at the market's response to Coach's earnings, you would have thought the company had returned to high growth mode and therefore was deserving of its premium P/E multiple relative to others in specialty retail. Heck, opening up the hood on Coach showed these fun facts: (1) 5.5% same-store sales gain, a sequential acceleration, amid an improvement in factory store sales plus a non-horrendous consumer response to products that are designed from Coach's extensive catalogs (Legacy line); (2) announcement of a new $1.5 billion share purchase plan that was rumored to be in play given Coach's cash balances and dwindling authorization on a previous program; and (3) the true profit margin story was not as a bad as appeared when excluding recent international distributor acquisitions. Of course, it was so very refreshing to see China sales pop 40% when so many other companies, from industrials to a Nike, are experiencing tepid gains at best inside a slowing macro environment. However, #HonestAbe thinks Coach is not where to look in retail, and here are the reasons why. •A +5.5 same-store sales figure resulted despite a major new program launch across gender, light years away from anything produced by Michael Kors even while a significant chunk of marketing dollars were thrown behind Legacy in stores and in the digital sphere (Facebook). Coach had two important quarterly drivers in Legacy and improved traffic at factory with coupons, and in that context a stronger same-store sales reading should have been delivered. Takeaways: competitive threats, validation of Burberry comments on aspirational consumer weakness. •#HonestAbe is well aware the Street loves to extract anything that doesn't fit with a majority held buy rating (I have played the game and know the drill), but Coach's reported margins will continue to be under pressure for the next few quarters as newly acquired businesses are integrated. That, in turn, should cap the earnings upside that is needed to first validate Coach's present P/E multiple and then, expand it. •The rate of China total sales growth slowed quarter over quarter to +40% from +60%. That's the deal, and happened as Coach continued to trumpet strong purchase intent/trends. •Shipments to North American department stores down AND planned lower into a holiday season, indicating share loss on the sales floor. This fits well with my checks on Coach's presentation on the department store floor…it's being out-merchandized.