Update Coach (COH)

01/20/2010 11:51 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Good sales and earning numbers from Coach (COH) for its fiscal second quarter but Wall Street wanted more and the stock was down almost 6% as of 11:15 in New York.

The pattern here of sell even on the good news reminds me of the market’s reaction to Intel’s (INTC) good earnings report last week. I used that selling as an opportunity to pick up shares of Intel. I’d think about doing the same with Coach. (The stock is already a member of the Jubak’s Picks portfolio.) For more on that sell on the good news at Intel and my buy on the shares see my post http://jubakpicks.com/2010/01/15/buy-intel-intc/

Earnings per share at the retailer climbed 12% from fiscal second quarter a year ago. Earnings of $241 million, or 75 cents a share, were up from $216.9 million, or 67 cents a share, a year ago. Revenues grew by 11% to $1.07 billion. Wall Street had projected earnings of 72 cents a share on revenues of $1.03 billion.

The best news for Coach was that sales in its home North American market finally rebounded. Same store sales in North America climbed 3.2% for the quarter.

Margins climbed in Coach’s North American outlets and gross margins for the company as a whole inched up to 72.4% from 72.1%.

In China, the key growth market for the company Coach continued to expand by opening four new stores in the quarter. That brought the company’s total in China to 37 stores. (In contrast Coach has 163 stores in Japan after opening one new store in the quarter.)

So where was the disappointment?

Analysts had projected that North American sales would grow by 3% to 6% in the period so the 3.2% growth barely hit the bottom of the expected range. Some analysts also fretted that falling inventory levels—inventories were down about 30% from the same quarter a year ago—were a sign that the recovery in North America wasn’t sustainable. I’m not sure I follow that logic: Going into earnings season analysts that follow Coach and other retailers were worried about rising inventories if the Christmas shopping season was weaker than expected.

I don’t see how this adds up to a 6% drop in the stock, but that’s what happens when traders decide to take profits on a stock that is up roughly three-times from March 2009.

As of January 20, I’m leaving my target price at $40 a share by October 2010.

Full disclosure: I own shares of Coach in my personal portfolio.

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