Coach Worth Close Look After Revenue Miss

NEW YORK (TheStreet) -- If you're a current Coach (COH) investor Tuesday's earnings release must have felt like arriving at your vacation destination and learning your luggage was lost.

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 Chart 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.

Coach doesn't have debt relative to available cash, and the price-to-earnings multiple is right in line compared to the S&P 500 ( SPY), the company simply didn't miss by much.

If you're reviewing Tuesday's drop to signal a buying opportunity, you're may find Wednesday or Thursday to be near the sweet spot.

Even so, there is no reason to hurry with Coach. Stocks falling as a result of this type of news usually take at least one good earnings quarters to recover. I believe Coach will have a quick recovery.

The gap down following earnings is a classic pattern. Apple ( AAPL) similarly disappointed with its earnings report and traded from $600 down to an intraday low of $570.

In these situations, the subsequent few days will see a newly established high that then becomes resistance. (Read my Investors, Stop Obsessing Over Apples Chart article.)

With quality consumer brands like Apple and Coach, it doesn't take long before value investors pick up on discounted shares. As Coach coupons appeal to retail buyers, so these share prices will lure investors.

Both Apple and Coach are focused on Asia and China in particular for future growth.

From the conference call, Lew Frankfort CEO said:
Our performance in FY '12 was highlighted by increases of 15% in revenue, 17% in operating income and 21% in earnings per share.
The top 30 deals set a Q1 record for deals over $1 million. In the quarter, we had 25 deals of $1 million or greater, nearly double from the prior year first quarter. Two deals were in excess of $5 million. And cross-selling was strong with more than 40% of the deals, including a middleware component and 3 being stand-alone middleware deals.
In China, Coach sales exceeded $300 million, up 64%, ending the year with nearly 100 locations. Second, our Men's business doubled in FY '12 to over $400 million, as we continue to open dedicated stand-alone and dual-gender locations globally, while also rolling out a broader expression of men's to nearly 1/3 of our North American retail stores by year end.

What's the best play with Coach? There should be a very attractive trade coming up Thursday if Wednesday closes lower than Tuesday.

Near the end of Thursday, if still trading lower, sell out-of-the-money puts. Investor fear pushes portfolio insurance prices up dramatically. Simultaneously, the stock price should bottom.

It's not one to get greedy with, so hold the options for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce) exit out with a quick hit and run for profits. Otherwise for longer-term investors, the best play is to wait until after next earnings release for an entry.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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