How Coach Got Knocked Off

Why did its stock get clobbered? Look no further than your local swap meet.
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Editor's note: This column was submitted by Stockpickr member Susanne Owen, also known as the Trading Nymph.

Teacher, Teacher, pick me, pick me ... I know what happened to the

Coach

(COH)

.

No, he is not in the teachers' lounge. He went to the swap meet. Yes, Coach seems to be at all the swap meets and small tourist shops everywhere. But wait -- that isn't the famous CC logo. It's GC. Oh, you mean they are all fakes? Who could tell? That would explain the $25 sale price. I thought it was just a really great deal.

Knock-offs have always been around. But why are they hitting Coach and some other companies so hard? First, it may cut into the bottom line. But really, how many people shop at swap meets one day and Coach stores the next?

What really may be happening is that fake Coaches are popping up everywhere because everyone wants to feel rich even though they cannot afford it. The people who are willing to pay $500 for a handbag are seeing their bags on the shoulders of 13-year-olds waiting for the bus. The Coach buyer comes to the sad reality that she is no longer special or better than anyone else by carrying this purse.

But I can hear you out there saying, "Wait -- fake Rolexes!" But there's an important difference. If you walk in any mall, you can easily tally up the number of fake Coaches -- and if you shelled out big bucks for the real thing, you're gonna be annoyed and you might not buy another one the next time around. The brand has suddenly lost its allure.

On the other hand, it is very hard to notice if someone's wearing a fake Rolex, so you're less likely to be annoyed if you shelled out big bucks for the real thing.

So Coach is a victim of imitation, which in this case may not be the best form of flattery. Even

eBay

has a warning on its site about OEM factories that specialize in selling exact reproductions of the original. In addition, Coach may not be helping its image much by having its shoes at Ross Stores or so many Coach outlet stores with plans to open more.

It is possible that Coach brought a lot of it on themselves with the number of outlet stores and their shoes in 800 locations, as detailed on their conference call. As a fellow Stockpickr indicated, the Gucci's and the LV's and the Diors have waiting lists -- the days of someone yearning for a Coach are simply over.

On the conference call Oct. 23, Coach indicated that "the recent deceleration in traffic and moderation in category growth from the torrid 20% growth levels we have seen since 2003 to a rate closer to 10% this fall has led us to be more conservative in our outlook."

CEO Lew Frankfort indicated that "when we look at our stats in terms of our ongoing attitude consumer research from an attitude perspective, the Coach consumer has never been more vibrant than she is today. She has actually the highest levels of metrics in terms of her belief and confidence in Coach relative to ranking Coach as one of her favorite brands, excellent value, a brand that she trusts, a brand that she would recommend. So, we believe both the Coach consumer and more generally, the high-end consumer is still out there and she spends when she shops."

Well, Coach has its research. I give you the

purseblog.com, whose 78,500 "Shallow Obsessing, Strongly Encouraged" members make it the No. 1 community for handbag lovers and shoulder-fashion fetishists.

One poster claimed to have seen three times as many knock-offs in the last month, with the other posters all agreeing. Another poster indicated that she heard some ladies talking, and they said that "Coach was the poor person's Louis Vuitton" and mentioned that Coach is not considered "designer." For whatever that's worth.

So we are seeing COH becoming a fashion victim. You may want to ask, what other "well-seen" fashion statements may also be seen on 13-year-olds at the bus stop?

Another possible candidate is

True Religion Jeans

(TRLG)

. It sells fashionable jeans at $200 or more, and has been doing well by it.

On Aug. 7, it reported earnings of $5.1 million vs. $4.9 million from 2006. It has a forward

P/E of 10.03, zero debt and 16.30% quarterly growth year over year, with a PEG of only .60. In its 10Q, True Religion only indicated a delay in denim and design production as risk factors. Around the time the company reported, it was trading over $19. Today it closed at $15.44. It was recently trading at $15.06.

It too seems threatened by brand dilution.

On Oct. 3, True Religion announced that it obtained a consent judgment in a trademark infringement case. Another company allegedly was using rainbows on the rears of its jeans, and TRLG complained that the rainbows were too close to the ones on its own jeans. So it is trying to go after the problem when it finds it. But that only stopped one manufacturer.

Also, True Religion jeans are now showing up on the clearance racks at

Target

. Good for us Target shoppers, maybe not so good for the brand.

So, sitting in the checkout lane, my take could be that to value a company's future, you must consider the increase in competition and in the real world off of Wall Street, and that competition may be just under the radar.

At the time of publication, Susanne Owen had no positions in stocks mentioned, although positions may change at any time.

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