Don't Hop Off Coach Yet

01/20/2010 1:10 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

There were good sales and earnings numbers from Coach (NYSE: COH) for its fiscal second quarter, but Wall Street wanted more and the stock was down almost 6% as of noon EST.

The pattern here of selling even on the good news reminds me of the market’s reaction to Intel’s (Nasdaq: 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 my buy of Intel shares, see this recent post.)

Earnings per share at the retailer climbed 12% from the fiscal second quarter a year ago. Earnings of $241 million (75 cents a share) were up from $216.9 million (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. (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 don’t see the logic in that. Going into earnings season, analysts who 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 threefold from March 2009.

As of January 20th, 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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