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Bear of the Day: Coach (COH)

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It's getting to be a quarterly habit for Coach (COH). The EPS-miss-and-gap-down that is.

I last wrote about the decline and fall of this once great luxury fashion retailer in August after their Fiscal Year 2013 fourth-quarter report disappointed the Street and sent shares gapping lower 8% from $58 to $53.

Then in October, my colleague Eric Dutram described the company's 1QFY14 report that tanked shares 15% from $54 to $46.

And for the hat-trick, last week Coach posted 2QFY14 earnings of $1.06 per share that missed the Zacks Consensus Estimate of $1.11, and tumbled 13.8% from $1.23 delivered in the prior-year quarter.

This time, shares gapped down "only" 6% from $52 to $49, as it appears the sell-off from $57 since the beginning of the year was investors getting ready for the inevitable disappointment.

The Hard-to-Swallow Numbers

Net sales for the quarter came in at about $1.42 billion, down 6% from the year-ago quarter and also fell short of the Zacks Consensus Estimate of $1.5 billion due to softness in North American market.

Gross profit fell 9.5% to $982.7 million and gross profit margin contracted 300 basis points to 69.2%. Operating income came in at $435.9 million, down 17.2% from the prior-year quarter, while operating margin shriveled 430 basis points to 30.7%.

Management stated that sluggishness in North American women's bag and accessories business offset sturdy growth witnessed in Men's, footwear and strong results across Asian and European markets.

Same Theme, Different Quarter

In August I wrote, "North American Sales, which account for 63% of Coach's total sales, were the major factor behind this setback. Same-store sales declined by 1.7% in the latest quarter.

The drop in sales of women's handbags in the North American region is at the root of the company's problems. And this was not an isolated event as a fall in comparable-store sales occurred for the second time in three quarters."

And in October, Eric summed up the good news-bad news this way...

"It wasn't all bad news as the company did see a strong performance out of its international segment, and in particular Chinese sales. This segment soared by 35% with a double-digit move higher in comparable store sales figures.

So while Coach has made some good progress in the international segment, it has seemingly come at the expense of its top market, the U.S. consumer. Without this business, Coach will be in deep trouble, and with declining margins on top of this story, it is easy to see why many are growing concerned about COH."

Fashion Warfare

The bottom line for Coach is that the company has lost ground to young shoppers who are serious about the fashion trends they follow. The company's executives have accepted this criticism on just about every conference call lately.

With aggressive, youth-oriented designers for competition like Vera Bradley (VRA - Free Report) and Michael Kors (KORS - Free Report) , the handbag wars are taking their toll on the more staid Coach designs.

And the situation has been compounded by the departure of several key managers. President for North America Mike Tucci, a ten-year veteran, and chief operating officer Jerry Stritzke (5 years) left the company last summer.

Such leadership departures have been a matter of concern as the company tries to reposition itself as a lifestyle brand and attempts to expand into clothing, jewelry and shoes.

January Store Update

Of course, Coach is a brand that will probably still generate billions in sales this year. They are not going away anytime soon.

During the quarter, Coach, the maker of handbags, wallets, shoes and other accessories, opened 8 stores in North America, thereby taking the count to 556. In Japan, total number of locations remained at 196.

In China, addition of 10 new locations during the quarter took the total to 142. Across Asia (Other) the company opened 4 locations taking the total to 98. Coach also acquired the remainder stake in the company’s European joint venture, and opened 4 stores resulting in total count of 24 stores.

Last Year, the Purse Went to KORS

While the appeal of the Coach brand and the company's staying power in fashion are not in question, the current sales outlook certainly is. The company may have some re-invention to do to regain the hearts and minds of the fashionistas and that will take time.

In the meantime, just watch the Zacks Rank to tell you when Wall Street retail analysts who intensely follow all these companies and trends have decided the comeback is for real. Their upward revisions to earnings estimates will show up and make the stock a buy again.

Until then, KORS appears to be running away with their customers. In full disclosure, I don't follow fashion trends and retail stocks intensely. But I do own two Kors ties -- and the stock for my Follow the Money portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow the Money trading service.

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