Why Coach, Inc. Might Keep Plunging

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Coach  (NYSE: COH  ) slipped about 1% this morning after Cantor Fitzgerald downgraded the luxury handbag and apparel company from buy to hold.

So what: Along with the downgrade, analyst Allegra Perry lowered her price target to $50 (from $61), pretty much in line with yesterday's close. While contrarians might be attracted to Coach's earnings-related plunge earlier this week, Perry believes the upside remains limited given the continuing trend of declining traffic.

Now what: Cantor doesn't expect growth to return to Coach's North American operations anytime soon. "[W]hile conversion rates increased again, traffic fell further, suggesting a step-up in marketing and communications efforts may be needed to encourage a return of customers; this will maintain pressure on margins in our view," Perry noted. "The stock remains well-supported by the highest free cash flow yield in our coverage universe (c.6%) and one of the highest dividend yields (c.2.7%), but in the absence of any near term, material improvement in momentum, we believe shares will struggle to see significant upside from current levels for now." Of course, for long-term investors with some patience, those cash flow multiples might be too juicy to pass up.

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  • Report this Comment On January 24, 2014, at 12:49 PM, VickieGoGood wrote:

    Coach is a quality product and I think you are wrong about the amount of ads needed to invigorate the brand. Women need to feel as if they have money to buy purses and not fashion accessories. Coach items last and the utility factor plus the style will bring the brand to the top with some marketing and innovation for electronic device bags.

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