Ralph Lauren, Coach Shooting Target Down

03/01/2011 12:00 pm EST


Michael Shulman

Editor, Short-Side Trader

Bet on the increasingly popular luxury brands and against the bullseye-wearing retailer, advises Michael Shulman of Short-Side Trader.  

I recently sent out an alert to short Target (NYSE: TGT). It's one of my favorite stores and a very fine company, but it's just in the wrong place at the wrong time. It finds itself in the middle of the retail pack between customers shopping for quality at the high end, and those searching for deep discounts at the budget-conscious end.

A core thesis of mine is "The New Frugal." People are spending a bit more now than in 2010, and a lot more than in 2009-but they are buying at the two polar-opposite ends of the retail economic scale. They're buying higher-end goods like iPads, leather backpacks and sweaters with that little guy on the horse, and they're also shopping with coupons online and at the deep discounters, such as Dollar General (NYSE: DG) and Costco (Nasdaq: COST).

The Wall Street Journal recently had a front page article on how Wal-Mart (NYSE: WMT) has failed, yet again, to move its customers to higher-priced items. [Nevertheless, Charles Carlson calls Wal-Mart "exceptionally cheap."-Editor.]

Target managed this transition some time ago, but now occupies the unenviable "middle-ground" position in the retail industry-and the middle of retailing is taking a hit. Target will get hit hard.

The upside picks for the New Frugal are the high-quality brand retailers outperforming the rest of the sector, names like Polo Ralph Lauren (NYSE: RL) and Coach (NYSE: COH), which made us money in 2010.

Betting on the Pony
I'm not a big believer in paying up for clothing that also advertises the company by putting its logo on the front of the product. Simply put, however, Ralph Lauren makes better clothes and the combination of quality and brand has sales flying.

Ralph Lifshitz (Lauren's given name) is a house painter's son from the Bronx. He has segmented his product line by distribution channel. Go to the company stores in regular malls or upscale neighborhoods, or to their location in a department store, and you get a full-price, expensive polo horse on the sweater.

Go to a discount outlet like Filene's Basement, an outlet mall or Polo Ralph Lauren's website and the clothes look the same but are of a lesser quality. Even so, the discounted products are still relatively high quality and it's a brand with cachet-and one that is now exploding overseas.

Ralph Lauren had a rocking fourth quarter and, while the stock price is high, the chart is looking very strong.

Put Me In, Coach
I have an outlet mall I frequent, and the Coach store has been the second-busiest store after Ralph Lauren since before Christmas.

As with RL, Coach has segmented its product line with lower-cost offerings that are still reasonably high-priced and high-margin-available in their regular and outlet stores.

The product line has a wide range of price points and appeals to both younger and older customers-again, just like Ralph Lauren. And the Coach brand is impeccable, with big gains also expected overseas in the coming quarters.

If you plan to short Target against long positions in Ralph Lauren and Coach, enter the latter with a lot of care. Use limit orders, start with quarter or half positions if the stock is trending down, and be patient.

[Despite a three-day bounce, Target shares remain down 13% this year, and the chart belongs on a clearance rack. In contrast, Ralph Lauren is up 14% in 2011, closing Monday just 1% below its recent record high. Coach is looking less strong, albeit not as weak as Target, as the stock plods near its 20- and 50-day moving averages after the recent loss of momentum.-Editor]

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