Options Trade – Coach, Inc. (COH)  Monday, March 11, 2013

COACH -- Undervalued, High Quality Blue Chip Company Poised To Bounce Back!

**OPTION TRADE: Buy the COH Jun 2013 50.000 call (COH130622C00050000) at or under $2.90, good for the day. Place a protective stop limit at $1.20 and a pre-determined sell at $5.20.

by Ian Harvey

March 11, 2013


Three things that are important when looking for a great retail stock: outstanding management, a repeatable business, and a timeless brand. Coach (NYSE: COH) scores three for three. Long-term management, led by CEO Lew Frankfort has built a reputation for high quality and lifetime customer satisfaction, both of which lead to repeat purchases. For women's handbags, that can cost hundreds of dollars; this positively screams brand strength.

Since its 2000 IPO, the stock has risen nearly twentyfold on the back of business execution that has delivered increasing profitability, strong returns on capital, cash generation, and successful business growth. The store base has grown nearly 10% annually. The dividend, introduced in 2009, has quadrupled since its debut (and will probably rise again in 2013). Strategic share repurchases have reduced the share count by more than 20% over the past half-decade. And Coach has done all this leverage-free, and boasts $936 million cash on the balance sheet.

Frankfort is stepping up to the Chairman's seat, with the architect of the company's successful foray into the Asian luxury goods market taking the CEO reins. Due to this transition, plus the company's own admission that 2013 will be an "investment year" has spooked many shareholders, which has put Coach in the position that makes this options trade possible -- but don't expect it to stay there long. The stock today is worth at least $60, even assuming muted growth going forward.

Description of Coach, Inc.

Founded in 1941 and headquartered in New York, Coach is the designer and marketer of fine accessories and gifts for women and men in the United States and internationally.

Coach’s product offerings include women’s and men’s bag, accessories, business cases, footwear, wearables, jewelry, sunwear, travel bags, watches and fragrance.

The Company operates in two segments: Direct-to-Consumer and Indirect.

Accessories include women’s and men’s small leather goods, novelty accessories and women’s and men’s belts. Women’s small leather goods, which coordinate with its handbags, include money pieces, wristlets, and cosmetic cases. Men’s small leather goods consist primarily of wallets and card cases. Novelty accessories include time management and electronic accessories. Key rings and charms are also included in this category. Men’s handbag collections include business cases, computer bags, messenger-style bags and totes.

Footwear is distributed through select Coach retail stores, coach.com and about 1,000 United States department stores.


Average Recommendation: Overweight Average Target Price: 61.18
Number of Ratings: 37 Current Quarters Estimate: 0.81
FY Report Date: 6 / 2013 Current Year's Estimate: 3.71
Last Quarter's Earnings: 1.23 Median PE on CY Estimate: 13.48
Year Ago Earnings: 3.52 Next Fiscal Year Estimate: 4.17
Median PE on Next FY Estimate: 12.00

Coach has a market cap of $13.76 billion and is part of the consumer goods sector. The company has a P/E ratio of 13.5, below the S&P 500 P/E ratio of 17.7. Shares are down 11.7% year to date as of the close of trading on Wednesday last week.

Coach facts



Headquarters (founded)

New York, N.Y. (1941)

Market Cap

$14.1 billion


Apparel, accessories, and luxury goods

Trailing-12-Month Revenue

$4.9 billion


Chairman/CEO Lew Frankfort

President/COO Jerry Stritzke

Return on Equity (average, past 3 years)



$858.7 million/$22.7 million

Dividend Yield



Michael Kors Holdings (NYSE: KORS

Ralph Lauren (NYSE: RL)

Tiffany (NYSE: TIF)

Earnings Results

Coach announced rather disappointing 2Q results with its North America business posting negative same store sales (SSS) of 2% and modest increases in sales and operating income. Further, management mentioned that its market share was 10%, which indicates that its competitor Michael Kors is eating into its market share.

However, on the bright side - its strong growth in China posted a 40% increase in sales. Its inventory was lower by 2% at $4.9 billion despite its recent acquisitions in Asia. Further, its margins have remained steady, with Gross margins of 72% and operating margins rising to 35%. Further, the Management did not increase its promotional activity in this quarter in order to achieve better comparisons vs. same quarter a year ago.

The Chart and the Technical Perspective

From a longer-term, multi-year perspective, Coach has traced out a massive bearish head-and-shoulders formation. But this formation will not be triggered until the stock closes below $45, about 10% below where it currently trades.

In the intermediate term, the stock has traced out what looks to be a nice rounding bottom that should allow more than 10% of additional upside from current levels.

The multi-year weekly chart below shows the stock moving nicely off the 2009 lows like most other stocks. While the going was choppy through much of 2011, eventually the COH resolved to the upside in the first quarter of 2012.

In the classic fashion of a stock-gone-vertical, the extraordinarily steep ascent from January through late March 2012 came to a sudden halt. Momentum traders that had chased the stock higher in the first quarter were quick to sniff out the trend reversal and jumped on the short side of the stock. And so COH erased 16 months' worth of gains in just four months.

The steep rise and fall of the stock ended up shaping a big head formation in the head-and-shoulders pattern. The neckline is easily spotted, coming in around the $45-$46 area. As mentioned earlier, the bearish formation does not get triggered unless this neckline is broken.

Closer up on the daily charts a different picture reveals itself -- one that is favorable to an options trade.

On Feb. 26, the stock again bounced off the neckline support near $46, leaving a bullish hammer candlestick behind on the daily chart. The following day, COH gapped up at the open and closed higher for the day. This is a classic formation to keep an eye on as upside momentum now has more room to go.

On March 5, Coach stock managed to break past its first meaningful resistance level near $49.60, which had kept the stock under pressure since early February. From here the stock has a minor resistance level to contend with at $52.44, which is the bottom of the big down gap from Jan. 23. Above $52.44 it's clear sailing with a price target of $55, which also more or less coincides with the stock's 100-day simple moving average. COH is currently trading at about $49.50.

Financial Capabilities

Despite headwinds coming from North America and Japan, COH expect 7% revenue growth, excluding an estimated -1.5% impact from currency translation, and 8.5% EPS growth in FY2013. They also expect moderating margin impact from acquisitions in 2H, and increased share repurchases. Below are our estimates and projections.

Growth Strategy

As of December 29, 2012, Coach saw capacity for 144 additional retail stores in North America. With a 30% market share in the U.S., the company is facing difficulty in further share growth and threats from competition. Rather than expanding aggressively to offset the slowdown in sales, Coach is planning to open only 5 North American retail stores in FY2013. Instead, the company focuses on renovating its current store base to create a modern store image and experience. They believe this steady approach will allow Coach to cultivate a hipper brand image, and at the same time build a solid foundation for future North American growth.

Much of Coach's recent sales growth came from overseas, especially from China. In FY2012, sales in China increased more than 40% YoY, and the trend continued as consistent double-digit comparable sales growth helped the region post 40% sales increases in the first two quarters of FY2013. With rising incomes and higher standards of living, Chinese consumers are becoming more capable to fulfill their desire to enhance social status by association with famous western brand names. And as an "accessible luxury" brand, Coach is able to capture a bigger portion of China's expanding middle and upper class than its higher-priced competitors. Well aware of this opportunity, management plans to increase net square footage in China by 35% in FY2013.

In both U.S. and Asia, Coach is seeking more growth in men's business. According to Bain & Company, men's apparel in the worldwide luxury market grew an estimated 10% in 2012, surpassing the 9% growth in women's apparel. As gains in market share become incrementally more difficult in women's business, it makes strategic sense for Coach to expand into men's. During the first two quarters of FY2013, the company has added seven men's factory stores in North America, and most of the new store openings in Japan during this fiscal year are expected to be men's. Coach's men's business is estimated to grow 50% globally to over $600 million in FY2013.

Takeover Possibilities

Coach’s valuation and cash generation -- enough to give it the third-highest free cash flow yield among peers -- could attract private-equity firms. LVMH Moet Hennessy Louis Vuitton SA (MC) and PPR SA may be among suitors drawn to its margins and the chance to expand Coach beyond the U.S. and Japan, which generated 86 percent of its sales last year, according to AIM&R. A buyer would have to bid at least 32 percent more than yesterday’s close.

Coach offers cash flow and international growth, as well as a great brand and a great balance sheet. The company is in the process of transition, and “this period of uncertainty could provide an interesting entry point to strategic, financial or management buyers.”

Analysts Reactions

Sterne Agee initiated coverage on Coach on March 04, 2013, with a Buy rating and a $58.00 price target.

Sterne Agee commented, "While the company's domestic business has admittedly struggled of late due to challenges from younger competitors (such as KORS, Tory Burch and kate spade), the company still has a very appealing global expansion strategy. Even with modest market share and margin declines in the U.S., we believe COH can continue to grow top line and maintain consolidated operating margins driven by growth in Asia-Pac. … While we wouldn't expect a real inflection in the business for another 6 months (Q3 likely soft as transition to “lifestyle” brand will take some time), a 2.5% dividend yield and an 8% FCF yield should help put a bottom in the stock until fundamentals improve."

Also, Coach has been reiterated by TheStreet Ratings on March 05, 2013, as a buy with a ratings score of B. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, increase in net income, expanding profit margins and good cash flow from operations. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself.

Several other analysts have also recently commented on the stock. Separately, analysts at Cowen initiated coverage on shares of Coach in a research note to investors on Tuesday, February 26th. They set a neutral rating on the stock. Finally, analysts at Atlantic Securities reiterated an overweight rating on shares of Coach in a research note to investors on Friday, February 15th. They now have a $68.00 price target on the stock.

Sixteen analysts have rated the stock with a buy rating, five have issued an overweight rating, fifteen have given a hold rating, and one has given a sell rating to the company. The stock currently has an average rating of overweight and a consensus price target of $61.18.


This stock has very low valuations -- its shares are trading at its 52 week low of $49 (52 week range: 45.87 - 79.70) as investors have dropped the company because of its better competition and recent modest financial performance. Further, as seen Coach's PE is lower vs. its peers making it a cheaper investment. Besides being cheaper, it also provides a better dividend yield vs. its competitors. Importantly, Michael Kors is a more expensive stock and also does not distribute dividends.

Management continues to deploy strategies to transform Coach from an accessory brand to a lifestyle brand. Coach has significant opportunity in men's products and the international segment, and the company has superior cash flow to fund investments as well as return capital to shareholders through dividends and share repurchases.

The post-earnings drop in Coach's stock price presented an excellent buying opportunity. At $49.50 per share, the stock has a dividend yield of 2.5% and an upside potential of more than 20%.

As well as its cheaper valuations, sufficient brand strength, and growing Asian business along with its strong dividend yield and buy-back policy an opportunity for a successful options trade has been presented.

Therefore, based on the facts above the following options trade is recommended…..

**OPTION TRADE: Buy the COH Jun 2013 50.000 call (COH130622C00050000) at or under $2.90, good for the day. Place a protective stop limit at $1.20 and a pre-determined sell at $5.20.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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