Coach shares plunge as slowdown hits the rich

Tiffany and Blue Nile also drop as investors expect luxury retailers to sag. Meanwhile, budget sellers like Target and Wal-Mart are having a strong year.

By Jonathan Berr Jul 31, 2012 11:56AM
Image: Young woman clothes shopping (© Image Source/Getty Images)Coach (COH) plunged more than 16% Tuesday after the luxury retailer reported disappointing U.S. sales and gave lackluster guidance, indicating wealthy consumers are starting to feel the impact of the economic slowdown.

Net income rose 24% to $251 million, or 86 cents per share, compared with $202 million, or 68 cents, a year earlier. Revenue rose 12% to $1.16 billion. Wall Street was expecting earnings of 85 cents on revenue of $1.2 billion.

Though overseas sales were strong, Coach CEO Lew Frankfort lamented that the "increasingly promotional environment" in North America led to lower growth than expected at the company's factory stores, which sell lower-priced merchandise. Same-store sales in North America rose a tepid $1.7%. A slowdown in the Chinese economy, a key Coach market, isn't helping matters either.  

"As a result, we responded by reinstating our prior practice of in-store couponing in a cross section of factory locations late in the period," Frankfort said in the earnings press release. To make matters worse in the eyes of investors, Frankfort described 2013 as "an investment year" because of "the impact of the muted consumer environment in North America and a softening global macroeconomic outlook."

Frankfort's view of the economy is hardly a shock. The U.S. economy slowed to a crawl in the second quarter, growing only 1.5%. Unemployment in the eurozone is at a record level as consumer confidence tumbled. Investors expect luxury retailers to be hit hard. Shares of Tiffany (TIF) and online jeweler Blue Nile (NILE) are trading down on the Coach news. Both stocks are down double digits this year. Meanwhile, Wal-Mart (WMT) and Target (TGT), which cater to more budget-conscious shoppers, are both up this year by double digits and will continue to outperform the luxury retailers for some time to come.  

Coach, though, isn't going to wither in the face of economic uncertainty. The company is expanding overseas and bolstering its digital business. Wall Street hasn't thrown in the monogrammed towel on Coach either. Analysts have a one-year price target -- at least for now -- of $78.04 on the stock. It was trading at $50.52 near midday. Moreover, the company remains committed to double-digit earnings growth.   

But keeping that promise may be difficult. If the U.S. economy hits another recession, people may think it's in bad taste to carry around a $898 Coach purse, even if they can easily afford it.
Jonathan Berr is long Wal-Mart and Target. Follow him on Twitter@jdberr.
Jul 31, 2012 12:14PM
Gee...just a few months ago the "analysts" were all recommending Coach as a buy due to their "strong earnings" etc.  As I have said many times before...there are no "experts" on this economy but rather people with an opinion.  Also for the CEO of Coach to say sales in China is somewhat questionalble since most Chinese companies knockoff and sell imitation brand luxury goods (Coach included) so why would anybody want the realy thing especially since all the counterfeit goods are made in China who is our "good friend and trading partner".....Right??
Jul 31, 2012 1:35PM

Although considered a 'luxury" brand, the middle class was Coach's top North American buyer. As the middle class declines, Coach can expect to fare as well.

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