Wednesday, October 29, 2014

Coach (COH): {Earnings Commentary}



Coach announced earnings around 7am yesterday morning. I woke up bright and early and listened to the results as I got ready for my workday. Coach is a company I've been keeping close track of for a couple of years now. I bought coach in 2012, ironically right before the time in which it started its downward spiral. As the say--- with the stock market you win some and you lose some. Owning this company during its tormentous years has taught me a whole lot not only about my personal risk tolerance (which, to my surprise, appears to be quite high) but about investing in general. I have been lucky enough that the vast majority of my portfolio has been successful but then there is always that one stock that you either need to sell immediately or you understand that it needs "more patience" than others-- and the latter is where coach has been for me for some time now.

Original Investment Thesis

One of the reasons why I first purchased shares was primarily because of the company's internationally recognized and incredibly strong brand. I had been wanting to put some money in retail- but not just any retail. I wanted a company with a history of strong earnings, profitability, and a solid brand. Truth is that for a very long time coach was one of the most profitable companies out there and they pretty much dominated the luxury bags sector for many, many years. However, as we all know-- past results are never a guarantee of future performance.

I still remember the days (not long ago) when owning a coach bag or any of its products was synonymous with style, elegance, and utmost luxury. Although this may still be the case to an extent the truth is that fierce competition, special from companies like Michael Kors (whom I believe to be its current main competitor) has resulted in Coach struggling to maintain its competitive advantage and the prestige of its brand. My original thesis for purchasing this stock has obviously changed in more ways than once including the fact that there has been a changed of management since my purchase of the stock. The company is currently going through growing pains resulting from an laser-focused and determined corporate strategy that is meant to position the company back on to a path of profitability. In general, the company is looking to transform in to more of a lifestyle brand and steering a bit away from that "luxury-only" focus the company has had pretty much since its inception.

Highlights From this morning's earnings call

The good…

  • The coach brand seems to continue its growth and strength at the international level. Overall- international sales increased 4% to $381 million in comparison to $365 million during this same time last year.
  • In China alone, sales increased 10% this past quarter with positive comparable store sales. Per the press release, Europe sales also came out strong growing at a “double digit pace” in both, total and comparable store sales.


The not so good…

  • Reported general sales of $1.04 billion, a decrease of 10% in comparison to sales same time last year which were reported at $1.15 billion. Net income was reported to be $146 million in comparison to $218 million, during same quarter last year.
  • Sales in North America decreased 19% to $634 million in comparison to $778 million during this same time last year—As per CEO Victor Luis; the sharp decrease in sales was triggered by Coach Strategy to lessen promotional events; a strategy that is meant to uplift the brand by lessening the amount of discount on products. The thought process behind this is that ongoing sales and coupons as well as ongoing outlet promotional events contributed to brand dilution. Hence, by lessening promotions; the brand is looking to strengthen; and this is an area of focus.
  • Operating income, margin and gross profit also showed a decrease in comparison to same quarter last year.


My Two Cents

The majority of my shares of Coach are on hold. As a long time investor, with a very long term view on my investments, I've made a decision to wait out this transformation period and keep the shares I currently own for at least 5 years. Although it feels like its been a century; I purchased shares for the first time around November 2012 so it hasn't even been two years. 

I have to be transparent and completely honest on this blog in terms of what I would tell an investor just starting out. Thus, I do have to say that unless your risk tolerance is extremely high and you understand this company is going through an aggressive transformation phase; this is not a stock I would recommend to anyone looking for a quick profit or a quick turn around. This is one of those high quality companies for which a whole lot of patience (and risk tolerance) is needed. 

In the meantime, I plan to continue collecting my dividends which is currently at a very nice yield of 3.80% ($1.35 per share). The company has agreed to continue paying this dividends as they continue working on their strategy of transformation. And this is a perfect example why most of my portfolio is composed of dividend-paying stocks; because you truly never know what can happen and at least you can still collect income  when the unexpected occurs. 

Tell me, what are your thoughts on Coach (COH)? {Its products and/or the stock itself}