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Why Did Coach Fall 6.0% on May 11?

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Price movement of Coach

Coach (COH) has a market cap of $10.6 billion. It fell by 6.0% to close at $38.18 per share on May 11, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were -5.5%, -2.1%, and 17.7%, respectively, as of the same day. This means that COH is trading 5.3% below its 20-day moving average, 3.9% below its 50-day moving average, and 14.6% above its 200-day moving average.

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Related ETF and peers

The ALPS Sector Dividend Dogs ETF (SDOG) invests 2.0% of its holdings in Coach. The ETF tracks an equal-weighted index of the five highest-yielding S&P 500 securities in each sector. The YTD price movement of SDOG was 10.8% as of May 11, 2016.

The market caps of Coach’s competitors are as follows:

  • Estée Lauder (EL) — $34.8 billion
  • Ralph Lauren (RL) — $7.2 billion
  • Michael Kors Holdings (KORS) — $7.8 billion

Coach fell after weak retail sector

Coach fell by 6.0% on May 11, 2016, after the fall in performances of Fossil Group (FOSL) and Macy’s (M) in fiscal 1Q16 and with the termination of the Staples (SPLS) and Office Depot (ODP) merger.

The termination of the Staples–Office Depot $6.3 million merger deal came about after a US federal judge halted the deal temporarily because of antitrust concerns. According to Emmet Sullivan, judge for the United States District Court for the District of Columbia, the FTC (Federal Trade Commission) met its “burden of showing that there is a reasonable probability that the proposed merger will substantially impair competition in the sale and distribution of consumable office supplies to large business-to-business customers.“

According to the merger agreement, Staples will pay Office Depot a $250 million break-up fee.”

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Coach in fiscal 3Q16

Coach reported fiscal 3Q16 net sales of $1.0 billion, a rise of 11.2% from $929.3 million in fiscal 3Q15. It opened two stores in North America, two in Japan, four in Greater China, two in the rest of Asia, and two in Europe in fiscal 3Q16. It also opened one Stuart Weitzman store globally this quarter.

Its net income and earnings per share rose to $112.5 million and $0.40, respectively, in fiscal 3Q16, from $88.1 million and $0.32, respectively, in fiscal 3Q15.

Coach’s cash and cash equivalents and short-term investments and inventories fell 16.0% and 4.3%, respectively, in fiscal 3Q16 from fiscal 4Q15. Its current ratio rose to 3.1x, and its debt-to-equity ratio fell to 0.78x in fiscal 3Q16 from 3.0x and 0.87x, respectively, in fiscal 4Q15.

Projections

Coach has made the following projections for fiscal 2016.

  • It expects Coach brand revenue growth in the low single digits in constant currency terms on a 52-week basis.
  • Foreign currency should hurt revenue growth by 2.3%–2.5%.
  • It expects the Coach brand’s operating margin to be in the mid to high teens.
  • It foresees an interest expense of ~$30 million.
  • It expects a tax rate of ~28%.

These projections don’t include pre-tax charges for the following:

  • transformational plan of ~$50 million
  • Stuart Weitzman acquisition charges of ~$30 million
  • charges related to operational efficiency initiatives

Coach also expects the 53rd week in fiscal 2016 to contribute ~$75 million–$80 million in incremental revenue and $0.06 in earnings per share.

In the next part, we’ll take a look at Blue Buffalo Pet Products.

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