Weakening sales and rising inventory levels have changed this contributor’s recommendation.
Sell: Coach (COH)
from Hendershot Investments
Coach (COH) reported disappointing third quarter results with sales down 7% to $1.1 billion and net income dropping 20% to $190.7 million. Total sales declined as weakness in the North American women’s bag and accessories business continued to offset strong growth in men’s, footwear and international sales.
Coach experienced sharply lower traffic levels in their stores with same store sales plummeting 21% during the quarter. Part of this was due to the severe winter weather during the quarter and the Easter shift. Internet sales also declined, impacted by management’s decision to curtail promotional events. Free cash flow plunged 68% during the quarter to $54 million. The company has suspended future share buybacks as cash flow is being conserved to maintain the dividend and meet working capital needs.
Inventory levels were up 13% during the quarter and are expected to be up for the balance of the year with sales below expectations, which is never a good sign for a retailer. Coach expects another woeful 21% store comp sales slump in North American stores in the fourth quarter as weak traffic trends continue.
During the fourth quarter, total sales are expected to decline 10% and moderate further in 2015. At the same time, the company will continue to invest in their stores and additional marketing, which will negatively impact EPS in fiscal 2015 as the company embarks on a multiyear journey to reinvent their brand.
Given these deteriorating business fundamentals, we have decided to hop off Coach and sell our position. Our ticket will be punched with a 6% loss with our decision to buy more shares in 2013 offsetting prior year gains.
Ingrid R. Hendershot, Hendershot Investments, www.hendershotinvestments.com, 703-361-6130, June 2014