Has Coach Gone Too Far, Too Fast?

I'm not a big shopper so this one may just be way out of my league. However, I'm concerned that Coach (COH) may have begun to show signs of beginning to moderate. Yes, I know they sell to the high-end customer who is not as affected by economic troubles. Yes, I know their guidance continues to point to higher EPS. I even know that most Wall Street analysts have it rated the equivalent of buy or strong buy.

In less than 12 months the stock has doubled from just over $25 to well over $50. That doesn't even touch the returns seen in 2002 through 2005, so the name shouldn't be new to anyone who traffics in growth stocks. The company has done a superb job of increasing its brand awareness both domestically and now abroad as it cements its strong foothold in Japan and looks toward China and the Middle East for further growth. The company now has something for everyone, as even measly middle class shoppers can get a handbag at one of the factory stores for less than $400. The company still makes an absurd margin on these cheaper bags and customers think they got a discount!

But has the company gone too far, too fast? With all these stores opening, one begins to wonder if its such a special thing to own a Coach handbag anymore. As middle class moms pass heiresses holding the same or similar purses on the sidewalk, I begin to think that the mystique could be wearing off. Celebrities may have to find a new way to spend their money that draws attention to their deep pockets and purses than buying.... purses.

So no, I don't think COH is going out of business anytime soon. I actually expect their sales to increase this quarter and for EPS to meet and maybe even exceed street expectations. But I would keep a close eye on margins to see if the company is still able to sell $1,200 bags that are available down the street for much less. I would look at their metric as to what percent of sales are from the category of $400 or more items and watch to see if the average revenue per transaction softens. The company may laud the fact that sales in the factory stores is up over 30% again, but the skeptic in me would be wary that this is just another name for outlet sales that could not be sold at full retail price in the main stores.

I do have a short position in COH and it is on a short leash. I realized that I could be very early to this game and I don't want to hold it if we resume the pattern of hitting new highs, but at this point I believe the risks far outweigh the potential gains for owning this stock. If you own the stock, why not sell it and go use the cash to buy a nice leather bag?

Disclosure: Author has short position in COH

COH 1-yr chart

Comments

[Paul Meisel]

It's had a good run, but I would be nervous shorting a good company.

Disclosure: sold in low 40s for a nice profit