If Coach Is Selling So Many Bags, How Come Everyone's Selling Its Stock?

Illustration for article titled If Coach Is Selling So Many Bags, How Come Everyones Selling Its Stock?

In general, the best shopping advice is not to shop at all. But if that's not good enough for you, I can always babble on about about margins and marketing long enough for you to forget why you wanted that frivolous piece of commodity fetishist crap in the first place. In this space I'll try to solve some of the mysteries of shopping, starting with that ubiquitous handbag label Coach.

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"So I don't get Coach," Anna asked me last night. "The news stories say their net is up 23%. But all these bloggers say they're in trouble." Ummm, what's to get? I wondered, before launching into a thirty minute IM screed re why I hate shopping/am a Marxist/should move to Cuba or whatever.

Q: So, if Coach's profits are up 23%, why are they in trouble?
A: Net profit means nothing. Maybe they produced a 23% gain in net profit by selling a bigger proportion of shit in Europe, where the Euros are beating our asses right now. Maybe they produced it by getting their accountant to change the tax rate. Maybe last year, their earnings were so strong they decided take a giant writeoff related to store openings, or better yet, waste a hundred million dollars on a vanity ad campaign so their earnings wouldn't look so scarily strong. Because in fashion the only thing truly disastrous is if you can't beat last year's numbers. If you can't beat last year's numbers, your proverbial stock is on the wane, which means your literal stock is on the wane, which I assume is the case for Coach, which would be how those intrepid bloggers picked up on it.

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Q: Well yes, Lauren Goldstein Crowe's opening sentence is "Coach shares are at a six-year-low."
A: Jesus, a six-year low. Six years ago this company was grossing less than $700 million a year. This year that number will be close to $3 billion, they've got over a billion dollars cash on hand just hanging out looking for a place to be invested, and Wall Street — in its infinite wisdom — thinks the company is less valuable than it was then. Think about that for a second.

Q: So the market isn't always right?
A: Well, all the market really cares about is short-term growth, though sometimes, if what you are selling is super important or indispensable or high technology or necessary for life and/or the treatment of restless leg syndrome, the market will make some exceptions. That would not be the case with Coach.

Q: Oh, so the problem is that Coach is no longer growing.
A: Well no, it's more complicated than that. In fashion you're expected to grow on a few fronts. Number one, every individual store you open should make higher sales than it did last year. Number two, you should constantly be opening more stores, to keep up with the mall developers constantly opening up more malls. Number three, the "same-store sales" numbers, which is to say, the sales at stores open a year or more, should always be growing at a rate higher than they did last year. Oh and also, your profit margins should constantly be growing, because you don't want to look like you're only growing by offering consumers more value. It's like the difference between velocity and acceleration in physics, I think, although I don't really remember physics.

Q: But isn't it impossible to sustain that?
A: Yes!

Q: So what are they expected to do?
A: Well, they can try to keep the momentum going for awhile by spending an inordinate amount of cash sending free purses to celebrity stylists, filling the nation's bloated fashion magazines with glossy advertisements, paying for product placement in movies, hosting multimillion dollar parties in exotic locations for the fashion trade press/buying and sales staffs of your local Nordstroms and Neiman Marcuses/sundry "tastemaker" demographic, outsourcing any manufacturing work you might still have been stupid enough to do domestically to the Third World factories doing all your competitors' bags — in Coach's case, they closed their last US factory in 2002 —
and, um, raising prices every year.

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Q: Doesn't all that shit get old?
A: That might begin to explain the billion or so dollars in cash Coach has sitting in its bank accounts.

Q: What should they do with that money?
A: Give it to orphans! Ha ha ha no seriously, they should probably buy back some of their shares at this bargain basement six-year-low. It apparently shows "confidence" in the brand or something. And you know what they say about perception and reality in fashion! If most of the population knew how to differentiate between them, the whole business would evaporate. Imagine that!

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DISCUSSION

Wow. You clearly have no understanding of investment fundamentals. Allow me to try to help, as I made a mint owning shares of Coach over the past four years. So let's start at the top.

1) Net profit means nothing. That's just plain wrong.

2) The reason why Coach's shares sold off yesterday (you'd know this if you'd read any one of the many many articles written about their press release, or actually read the press releasse yourself) is because their forecast for the remainder of the year and 2008 was less than people thought. Management said that traffic at stores had been weaker than they'd hoped for and thus they were revising their expected profits down (profits again! Doh!!).

3) They didn't take any giant write offs. They didn't conduct a vanity ad campaign and their profits were up 23% vs last year. This suggests that, follow me now, that they beat last years numbers, by ... 23%!!!

4) One thing here - just a basic stock price lesson. The price of a stock is the sum total value of - this is important - FUTURE EARNINGS!! A stock price is, actually, a present value of said earnings. So, if future earnings are revised down, guess what? The stock price should naturally follow as the present value of future earnings is lower. Still with me? Good.

5) I don't know any Laura Goldstein Crowe, but I suggest NOT taking investment advice from her. On a Split Adjusted Basis, Coach's stock was priced at $3.66 on October 24, 2001. According to my math, that is less that $36.40 where it closed today. It's in fact about 1000% better today. Look at the number of shares, people. The stock has split three times since 2001 (2002, 2003 and 2005).

6)As for the market caring only for short term growth, that is partially true. Hedge funds are generally more concerned with short term growth. This, however, is not the bulk of the market.

7) Whoever taught you about Same Store (or "Comp") sales was incorrect. Stores are not expected to grow at a higher rate than last year. What is looked for, however, is a positive rate of comp sales.

8) Coach's cash on their books (the $billion you keep referring to) is used constantly to open new stores, refurbish older stores (remember when they closed the 57th/Mad store a few years back and how much better it looked when they reopened?), and buy back stock. It is also widely speculated that they are looking to make an acquisition. The number one target that was subject of chatter for the past few years was that they were going to buy Burberry, especially after their CEO retired last year.

9) Coach and its management team (Lew Frankfort, Reed Krakoff, Mike Devine et al) is widely considered to be one of the best in all of apparel and accessory retailing.

Sorry to be so shrill, but I felt they needed a little sanity in their defense.