New Trade COH – This Ain’t Your Ol’ Coach

by Enis August 30, 2012 3:16 pm • Commentary

COH has quite a chart for the last year:



The stock went from 50 to 80 and back to 50 over the last year.  The puke shot on Jul 31st after earnings was quite a move, sending the stock down $11 on a huge gap and massive volume.  In fact, that was the largest single volume day in COH stock since August 2004.  In hindsight, that move turned out to be short-term capitulation, as sellers have disappeared, and buyers have been in control ever since.  Given that the stock went from 80 to 50, down almost 40%, in the span of 4 months, this bounce is not a big surprise.  But COH has shown its hand in my view, and I expect a retest of that 50 level in the not too distant future.

What spooked COH investors?  CEO Lew Frankfort’s own words offer a clear explanation.  His words from the Jul 31st press release:

As we look forward to FY13, we are mindful of balancing the impact of the muted consumer environment in North America and a softening global macroeconomic outlook with our optimism around the launch of Legacy, Men’s and the strong international expansion opportunities for Coach.  Additionally, FY13 will be an investment year, as we amplify our actions to drive long-term growth.  Most significant is our acceleration of the acquisition of the domestic retail operations of key Asian distributors – including those in Malaysia and Korea in the first quarter – and the further development of the infrastructure to support our global growth.  In addition, we’re distorting investments in the digital space to strengthen our capabilities and deepen our engagement with consumers.  We expect that together these investments will result in modest deleverage in FY13.


My Translation:  We don’t anticipate turning around the ship for the next 4 quarters, and are praying for the resumption of growth in Asia to offset the difficulty we’ve encountered in domestic competition (primarily from Michael Kors).  Unfortunately, international growth is slowing more rapidly than we expected, so we’re concerned that Asia won’t save us.  So we’re throwing some money into the digital space and hope that helps.

The real issue for COH is it has lost its cachet as the premium U.S. hand bag brand.  The retail fashion cycle is about as fickle as it gets, and COH as seen its U.S. dominance erode with the influx of competitors.  Meanwhile, its rapid Asian expansion over the past 3 years might turn out to be a mistimed strategic move, as Asia is clearly showing the most worrying signs of slowing over the past quarter.

I think the pre-earnings gap at 60.58 is an obvious target, but with COH less than 5% from there on today’s rally, I think this is a decent entry for a resumption of the downtrend.  I want to give this trade more time given the possibility of a move up to the 60-62 area over the next month, so I’m trading out in November:


TRADE: COH ($57.50) Bought Nov 55 / 45 put spread for 2.60

-Bought 1 Nov 55 put for 3.60
-Sold 1 Nov 45 put at 1.00

Break-Even on Nov expiration:
-Profits btwn 52.40 and 45 make up to 7.40, max gain of 7.40 at 45 or below
-Losses of up to 2.60 btwn 52.40 and 55, max loss of 2.60 at 55 or above

TRADE RATIONALE:  While going out to November makes this trade more expensive, and less attractive risk/reward optically, I feel much more comfortable holding 2.5 month options rather than 0.5 month or 1.5 month options in September or October expiry.  This is a similar trade to my TIF Nov put spread position, and the thinking is similar as well.  The fundamental headwinds should re-assert themselves by then in my view.