True Winners of Coach's Dip

By Palwasha Saaim - October 2, 2012 | Tickers: COH, KORS, RL | 0 Comments

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Luxury handbags retailer Coach (NYSE: COH) tumbled 14% in 15 days, this month alone. If you think this was following its warning that ‘consumer confidence is weak’, then no, you’re wrong. That warning came two months ago and the stock recovered from its post-warning fall within days. I blame Michael Kors (NYSE: KORS) for the recent Coach sell off. Kors revised its earnings guidance for the year, upping its estimates, which led to a surge in its stock price. How does that affect Coach? Kors must be taking away some of Coach’s market share to report better than expected earnings.

But that’s the thing about competition

Even if things are looking great at Kors, it doesn’t necessarily mean that its competitor will become any less desirable. For 2012, Coach has been the top most searched for handbags brand in the world. Michael Kors takes the tenth position in the rankings. But again, being searched for is one thing, being bought is another. Remember, none of the three handbags (Hermès Birkin, Chanel 2.55 and Louis Vuitton Speedy) that continue to be in vogue this year, around the world, are from Coach or Michael Kors.

Winners of Coach’s dip

One thing is interesting about Coach’s recent dips. When the warning shook bulls' faith in the stock, at the same time it helped the bears pocket some dollars. See below the trend of number of shares short (in millions) and further below is Coach’s price movements (to make comparison simple, I've included visual charts and tables instead of a lengthy narrative). 

Compare Coach to peers Michael Kors  and Ralph Lauren. Both the peers are losing popularity amongst bears. Coach is the retailer with the largest percentage of its float short and underperform calls on the stock have increased by 5% in the first half of this month. Short interest in the other two industry players is diminishing. 

Do present fundamentals justify Coach's bearish outlook?

Speaking strictly in terms of fundamentals, Coach, at present, is by far the best amongst the US luxury sector retailers, including Michael Kors (NYSE: KORS) and Ralph Lauren (NYSE: RL), and I don’t see either of the two peers overtaking these financials any time soon. I've rated Coach's fundamentals as best, good and worst based on which place (top, middle and bottom, respectively) they took compared with the two peers. 

Bottom line

Coach keeps its customers coming back to its store by keeping prices lower than its competitors. This could affect margins but amid the current economic slowdown, falling consumer purchasing powers and an anticipated recession, this could prove a boon to Coach. Additionally, developed international markets including Japan and China have helped the company grow. Slowdown of Chinese economy could pose a threat but that threat stands in every retailer's way. Michael Kors, of course, is an exception since it's recently started to formally expand and expansion will bring in revenue growth. However, Coach can still find avenues of growth in emerging markets, like India. The tables above summarize Coach's strong financial picture. It appears that the current dip might have made Coach a good bargain at the moment.

The shorts may have won in the short run but the price slump can make the long term investors, who utilize the current buying opportunity, the ultimate winners. Consider adding it to your watchlist. 

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