GO
Loading...

Stutland: Can Coach Open a New Bag of Tricks?

Source: coach.com

Before the market opened yesterday, Coach reported fourth quarter earnings of $1.18 per share, versus the $1.28 expected. Revenue also came in low, at $1.5 billion, below the $1.6 billion estimate. The stock was sold hard on the news, and ended the day down 16%.

Despite the big move, one option trader made a bet that the stock will move lower still, by buying 2,250 February 55-strike puts for $3.50 each when the stock was at $52.07. This trade will profit if Coach is below $51.50 (1% lower) at February expiration.

There are a few reasons to be bearish on this stock.

First of all, sales fell during the holiday period, despite a 10% increase in the overall handbag and accessories market, and Coach's share of the North American handbag market fell too.

The company's biggest product launch of the last decade was the Legacy line, which was aimed at regaining market share lost to competitors Kate Spade, Michael Kors, and Ralph Lauren – but it failed to make a difference in December.

Meanwhile, the bullish case for the stock is that it now trades at a 5.8% discount to the S&P 500 on a price-to-earnings basis, which is the biggest discount in three years. Coach also generated gross margins of 72% last quarter, which are better than the gross margins at Michael Kors and Ralph Lauren.

The company announced that their latest plan for reviving sales is to develop a lifestyle brand that moves across multiple products. This will undoubtedly involve increasing marketing expenses, and selling lower-margin women's apparel. My money will be on the sidelines while we wait to see if Coach can pull off this turnaround. The stock has already dropped 16%, and I don't see it moving too much lower without attracting value investors. At the same time, there isn't a reason to buy the stock until we know that management can deliver results. I would like to see sales and market share increase, even if margins have to decrease slightly.

Buying puts to limit further losses on a long stock position makes sense, but I will not be buying puts simply to speculate on a further sell-off.

Disclosures: I have no disclosures on this stock.

Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."

Watch "Options Action" on CNBC Fridays 5:00 p.m. ET, Saturdays at 6 a.m. ET and on Sundays at 6 a.m. ET.

Questions, comments send them to us at: optionsaction@cnbc.com

Symbol
Price
 
Change
%Change
COH
---

Contact

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Latest Video

Options Action Daily Reports

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.

You Make the Call

  • Mike Khouw, Options Action trader, shares his view on News Corp stock on the heels of testimony from Rupert Murdoch before British Parliament.

  • Do you have a question for the Options Action team? Options Action selects a viewer's question and gives the answer on the show's Make The Call Web Extra video.