Coach's Second-Quarter Report Disappoints Wall Street

Coach (NYSE: COH  ) , once the darling of the luxury goods market, has just released another dismal earnings report. Investors are left with the decision to continue holding on for a possible turnaround or to sell and invest elsewhere. Let's take a deeper look into the report and decide what the best route would be.

The handbag giant
Coach is a global leader in premium handbags and accessories. The company sells its products through its own stores, specialty stores, and select department stores such as Macy's and Dillard's. It also operates e-commerce websites in the United States, Canada, Japan, and China.

The dismal report
Second-quarter earnings for fiscal 2014 were released before the market opened on Jan. 22, and the results missed on both lines. Here's a breakdown of the report:

Metric Reported Expected
Earnings per share $1.06 $1.11
Revenue $1.42 billion $1.48 billion

Earnings per share decreased 13.8% and revenue fell 5.3% year-over-year, as a result of weaker-than-expected sales in handbags and accessories, and slower customer traffic in its stores. Gross profit declined 9.4% to $982.7 million as the gross margin plummeted 300 basis points to 69.2%. This was a horrible quarter all around for Coach, and caused the stock to open the trading session down more than 7%. I believe the sell-off is more than warranted and the stock will likely see continued weakness over the next several weeks.

North American collapse
Coach's largest segment, North America, was an absolute nightmare in the second quarter. Total sales declined 9% to $983 million, as direct sales fell 8% and shipments to department stores were weaker than expected. Worst of all, comparable-store sales declined 13.6% as women turned a blind eye to its product offerings; men's footwear, on the other hand, performed well, but this is such a small segment that it had little impact on earnings. Regardless of success overseas, North America makes up nearly 70% of total sales, so Coach needs to do everything possible to get it back on track. Maybe the company should revisit the idea of going private...

Source: Michael Kors.

Top competitor's earnings due out soon
Michael Kors (NYSE: KORS  ) , Coach's most feared competitor in the industry right now, is about to report its own quarterly report. It is home to one of the most in-demand lines of handbags, watches, and accessories, which has absolutely eaten into Coach's market share.

Analysts are much more bullish on Kors than they were on Coach, because it has been one of the highest-growing companies in the market over the last few years. Here's an overview of the current expectations:

Metric Expected Year-Ago
Earnings per share $0.86 $0.64
Revenue $860.95 million $636.79 million

These expectations call for earnings per share to increase 34.4% and revenue to rise 35.2% year over year. I believe the estimates are attainable because of the strength in the Michael Kors brand and momentum from the second quarter. With Coach missing estimates once again, I believe investors will sell out of Coach and pick up shares in Michael Kors, due to its high growth and track record of exceeding expectations. 

The Foolish bottom line
Coach has been a disappointment for quite a while now, and investors cannot ignore the fact that Michael Kors is a big reason. As Coach has fallen, Michael Kors has risen to stardom and become the consumer favorite in the luxury goods market. For this reason, I believe Coach is untouchable and that investors holding the stock right now should strongly consider selling. If you want exposure to this growing industry, look no further than the top dog, Michael Kors.

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  • Report this Comment On January 22, 2014, at 2:20 PM, MaxTheTerrible wrote:

    So, you're advising to sell COH (with its clean balance sheet, 2.7+% dividend) and buy KORS (the high flying Wall street darling with lofty expectations already priced in)?..

    Isn't this a definition of buying high and selling low?

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