Yesterday before the market’s open Coach reported a fourth quarter earnings of $1.18 per share versus $1.28 expected and $1.5 billion in revenue versus $1.6 billion expected. The stock was sold hard on the news and ended the day down 16%. Despite the big move one option trader is betting that the stock will move lower by buying 2250 February 55 puts for $3.50 with the stock at 52.07. This trade will profit if Coach is below 51.50 (1% lower) at February expiration.
There are a few reasons to be bearish on this stock: sales fell during the holiday period despite a 10% increase in the overall handbag and accessories market, and Coach’s market share of the North American handbag market fell too. The company’s biggest product launch of the last decade was the Legacy line, which was aimed to regain market share lost to competitors Kate Spade, Michael Kors, and Ralph Lauren, but it failed to make a difference last December. The bullish case for the stock is that it now trades at a 5.8% discount to the S&P 500 on a PE basis, the lowest in three years. Coach also generated gross margins of 72% last quarter, which are better than the gross margins at Michael Kors and Ralph Lauren.
The company announced that their latest plan for reviving sales is to develop a lifestyle brand that moves across multiple products. This will undoubtedly involve increased marketing expenses and selling lower margin women’s apparel. My money will be on the sidelines while we wait and see if Coach can pull off this turn around. The stock has already dropped 16% and I don’t see it moving down too much more without attracting value investors. At the same time there isn’t a reason to buy the stock until management can deliver results. I would like to see sales and market share increase, even if margins have to decrease slightly. Buying puts to limit further losses in a stock position makes sense, but I will not be buying puts simply to speculate on a further sell off.