Why Coach Dropped and American Apparel Popped Today

The blue chips edged higher as Coach tumbled on a disappointing forecast, and American Apparel rose after its CEO was axed.

Jun 19, 2014 at 10:00PM

Stocks mostly crept higher today as yesterday's endorsement of the economic recovery by the Federal Reserve seemed to carry over to trading today. The S&P 500 gained 0.1%, to close at another record high, and the Dow Jones Industrial Average (DJINDICES:^DJI) was up 15 points, or 0.1%. The Nasdaq ended the day down 0.1%. 

The day's economic data was mostly positive, as initial unemployment claims last week slipped from 318,000 to 312,000, slightly better than estimates of 313,000. Continuing unemployment claims fell to 2.571 million, its lowest level since October 2007, and a sign that the labor market is continuing to improve in June as it has through the spring. Elsewhere, the Philadelphia Fed said manufacturing activity expanded in the region, as its index increased from 15.4 to 17.8. That beat estimates of 13.4, as categories including general activity, new orders, and shipments were positive for the fourth month in a row. Earlier in the week, the Empire State manufacturing report also showed robust expansion in New York, a further sign that the manufacturing sector is coming back following improvement in employment and consumer spending.

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Turning to individual stocks, Coach (NYSE:COH) shares plummeted today, falling 9% as the company issued an ugly forecast for the coming fiscal year. Management said it expected sales to drop in the low double-digits and sees a comparable-sales decline in the high teens. Shares of the handbag maker have fallen close to 40% this year on declining sales due, in part, to increased competition from Michael KorsKate Spade, and others. Tastes are fickle in the fashion world, and Coach has neglected its brand by overinvesting in outlet stores, cheapening its brand image. New CEO Victor Luis is also focusing on expanding the product line into items such as trench coats and shoes, but that strategy has yet to yield results. Considering the rut in which the company now finds itself, I'd expect shares to continue to fall before any turnaround takes hold.

Elsewhere in the clothing business, American Apparel (NYSEMKT:APP) shares finished 7% higher after the board suspended CEO Dov Charney, and said it intends to remove him from his leadership post following a 30-day interim period, required by his contract. Charney, who founded the American-made clothing retailer, has been a consistent subject of controversy over the years for various sexual harassment claims, and the board made reference to "alleged misconduct" in its press release announcing the decision, but did not elaborate. Financially, the company has struggled lately, losing more than $100 million in 2013, and has not been profitable since 2009. Shares have also fallen 70% in the past year. On a sales basis, the stock is cheap at a P/S of 0.18, prompting some to speculate that the company could be the target of a buyout, though the board said it had no intentions of selling the company. Even if the company doesn't get sold, Charney's ouster could pave the way to a new direction that could bring profitability. Still, this story may not be over, as some expect Charney to fight his termination.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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