Is It Time to Play Coach or Should You Stay Seated on the Bench?

Source: Coach

Over the last two months following its last earnings report Coach  (NYSE: COH  )  has seen its stock price continue to tumble almost daily.  The results were disappointing but at some point will the fall be enough?

Now as the stock barely holds onto $35 at the time of this writing after falling like a brick by another one-third since earnings day, the bag company may unfortunately still have plenty more room to drop like a stone.

Be careful of falling knives
Two months ago, Coach reported fiscal first-quarter results. North American sales slid 18%, same-store sales fell 21%, and net income plunged 20%. I wish I could say this occurred because of weather or some other crazy excuse, but the declines have been part of an overall trend for Coach.

As I wrote about in the previous fiscal quarter, for the second quarter North American revenue got chopped 9%, same-store sales got slashed 14%, and overall net income got clipped 16%. The company then warned of a "new competitive landscape." It sounds like the landscape has only gotten worse, not better. How do you value and invest in an outlook and results that look like a falling knife?

Anti-investor day
Coach held an "Analyst and Investor Day" in order to present the company's plans for the future and quell Wall Street's concerns. Instead, the meeting spooked investors, who ran for the hills and slammed the stock downward that day as many investors threw in the towel.

During the meeting Coach announced that it will close 70 of its stores, warned that revenue would likely drop by a low double-digit range over the next year, and predicted that North American same-store sales would continue to spiral downward by a high-teen percentage.

While Coach pays a decent dividend with a yield of around 4%, it's more of a consolation prize for a stock that's doing the limbo dance. How long can a company keep up its dividend when net income and its very business appear to be going down the tubes?

Source: Coach

Coach tries to coach investors
Coach insists that it's not about the here and now or even the next collection it will launch, it's about the long term and how the brand evolves. Victor Luis, CEO of Coach, stated, "We are confident we're taking the appropriate strategic actions, knowing that this is a multi-year journey that ensures both brand vibrancy and healthy, long-term growth."

But really, what else is he going to say -- we're doomed, you all better sell and get out while you can? How often do brands that were hot yesterday and have become duds today resurface as hot again in the future? I suppose there are plenty of examples like Adidas, but they are few and far between in overall terms.

Foolish takeaway
There are certainly no solid signs in North America of a Coach brand revival since the brand apparently hasn't stopped collapsing yet. Fools should wait on the sidelines for at least some clue of stability on sales or even a slower pace of the bleeding apparent from negative growth before it's time to consider Coach again. If and when the business turns around and returns to hyper growth again, investors will likely have plenty of time to grab on for the ride, even if a little late, while avoiding the dangerous risk the stock currently seems to present.

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  • Report this Comment On July 05, 2014, at 11:55 AM, kakakabat wrote:

    The numbers will remain ugly. COH has no more business in the U.S. because it caters to the people who have less and less disposable income. COH is not a luxury brand, it is not a youth brand, it is not really defined.

    Only chance it has is Asia. I would wait until next report to consider buying, maybe it will be 10% cheaper.

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