Coach's shareholders ran for the exits causing an 18% opening gap lower from Monday's closing price. Coach is nearly unchanged from a year ago but remains in a bearish trend on the daily chart.
Not everything contained in the earnings release was negative. Margins improved, sales in Asia increased and company-owned same-store sales in North America improved.
Coach announced the reinstatement of coupons last month in a bid to shore up revenue. Discounting is never considered fashionable by investors and Wall Street made its disappointment loud and clear.Stocks with a price-to-earnings ratio under 15 have historically outperformed the market. However, in today's market environment of expanding profitable companies trading at or near single digit price-to-earnings multiple, a multiple of 15 isn't quite the value it once was. I believe the panic selloff is overdone. Analysts estimated earnings at 85 cents per share, a gain of 17 cents (20%) from 68 cents during the corresponding quarter last year. Coach actually beat the estimate by a penny to come in at 86 cents per share. Revenue was a slight miss at $1.16 billion, rising 12% over last year, albeit less than the $1.2 billion investors looked for. Considering the coupons, and the close revenue achievement combined with a beat on earnings, I don't see Coach continuing downward for long. Based on my experience with gaps down similar to Coach, investors will likely see the short-term low Wednesday. With Tuesday's opening price within 1 cent of the low, additional downside pressure probably won't last long. COH data by YCharts
Bargain hunters and the few short sellers covering positions could push the price up over $55 by the end of the month. The current float short is small and not a big concern, plus they provide fuel for Coach to appreciate again. Short interest is 4.9%. Looking at the chart, I expect short-term resistance near $55. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $50 a share on Thursday, but also expect bargain hunters to start positions under $49 as an entry.
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