COH - Coach

[Sunrider]

boilermaker75 - I'm curious about something. If you assume that your "target buy" price is 50-53. (just ad hoc assumption)

 

So would it make sense to sell the January 2015 $90 puts for a premium of $38.60?

 

If the option is triggered, you have to buy it at 90, but it will be offset by premium of 38.6 to give you a purchase of  $51.40. On the other hand if it is not called, you just made $38.60 while risking $90 of capital....

 

Anybody can feel free to point out my mistake.

 

Do you think it's worth 90+? If so that may make sense for you if you're willing to wait until then. If you believe it'll approach that price faster then may options with strikes closer to the current price may be preferable. Another way to look at it is that you're taking a leveraged position in the underlying and you could look at what share price rises would be required to deliver a certain return (for a straight stock position or for various alternate option positions... then chose the one with the least costs and the highest subjective likelihood).

 

C.

[hyten1]

palantir, also you forget what if the stock is at $20, $30 or $40?

 

i am no expert with option, but personally i don't usually use puts this way. I usually sell way out of money or  close to at the money puts (if i want the stock now or soon).

 

way out of money put are just a little permium collecting and if the stock hits a lower price its a bonus i'll buy it. i usually do this for stock i would only buy if the price is way lower than current price.

 

just my beginners two cents

 

hy

 

boilermaker75 - I'm curious about something. If you assume that your "target buy" price is 50-53. (just ad hoc assumption)

 

So would it make sense to sell the January 2015 $90 puts for a premium of $38.60?

 

If the option is triggered, you have to buy it at 90, but it will be offset by premium of 38.6 to give you a purchase of  $51.40. On the other hand if it is not called, you just made $38.60 while risking $90 of capital....

 

Anybody can feel free to point out my mistake.

[boilermaker75]

boilermaker75 - I'm curious about something. If you assume that your "target buy" price is 50-53. (just ad hoc assumption)

 

So would it make sense to sell the January 2015 $90 puts for a premium of $38.60?

 

If the option is triggered, you have to buy it at 90, but it will be offset by premium of 38.6 to give you a purchase of  $51.40. On the other hand if it is not called, you just made $38.60 while risking $90 of capital....

 

Anybody can feel free to point out my mistake.

 

 

Palantir,

 

I prefer the shortest time to expiration just because the option premium I collect represents the largest potential return--assuming I am looking to generate cash and not using the put option as a potential limit order. Also if I am looking to own the stock and use the put as a pseudo limit order it gets my holding for long-term capital gains started.

 

So on Tuesday I wrote the 52.5-strike puts that expire on Friday for $0.90, which is a 3 day return of  1.6% if I do not get put to.

 

Your strategy is fine if you want to be sure to own COH and get an additional $1.10 reduction in basis. But let’s look at what is different if the option is in- or out-of-the money at expiration.

 

Let’s say at expiration COH is at 89.99, so you are put to and you own COH with your basis of $51.40.  A good return and you don’t have to do anything else at that point if you like COH. But you have to wait another year to be at long-term capital gains.

 

Let’s say on expiration COH is at 90.01, so you do not get put to and you get to keep the $38.60. But you will have to pay taxes on this $38.60 as ordinary income.

 

Boiler

 

[Palantir]

palantir, also you forget what if the stock is at $20, $30 or $40?

 

I'm thinking of this as an alternative to an outright purchase. So if the stock dropped I would have a loss anyways right?

 

 

i am no expert with option, but personally i don't usually use puts this way. I usually sell way out of money or  close to at the money puts (if i want the stock now or soon).

 

This is probably best actually, makes sense.

[Palantir]

Let’s say at expiration COH is at 89.99, so you are put to and you own COH with your basis of $51.40.  A good return and you don’t have to do anything else at that point if you like COH. But you have to wait another year to be at long-term capital gains.

 

Let’s say on expiration COH is at 90.01, so you do not get put to and you get to keep the $38.60. But you will have to pay taxes on this $38.60 as ordinary income.

 

Just to clarify, I'm doing this inside a RoIRA, so no taxes. Scenario 1 makes sense. Scenario 2 is also good though...

 

I guess the problem is as hyten1 stated, what happens if it drops to 40s or lower...

[Ross812]

boilermaker75 - I'm curious about something. If you assume that your "target buy" price is 50-53. (just ad hoc assumption)

 

So would it make sense to sell the January 2015 $90 puts for a premium of $38.60?

 

If the option is triggered, you have to buy it at 90, but it will be offset by premium of 38.6 to give you a purchase of  $51.40. On the other hand if it is not called, you just made $38.60 while risking $90 of capital....

 

Anybody can feel free to point out my mistake.

 

That is essentially the same thing as going long the stock at $51.40. You are tying up $5140 of capital (9000-3860) for two years. Your downside is limited to $5140 and upside limited to $3860. You are trading upside beyond $3860 for $190 in time value or 3.7% of your principal.

 

Instead, you could use the leverage...buy one DITM '15 $30 call for $2330. Sell the $75 call for $130 pocketing the 5.5% premium and have a chance for a potential double while keeping your downside limited to $2160.     

[bmichaud]

Attached are some Street comments on the quarter.

 

Started building a position today. Love the balance sheet capacity and mid-size market cap.

COH_Street_Commentary.pdf

[Phaceliacapital]

I have a few questions for those with a position

 

- What kind of moat do you see in their business?

 

- What prevents another "Michael Kors" event?

 

- Are you taking a position from a fashion point of view which kinda requires you to follow the fashion trends or is it purely on a cheap quantitative basis?

[CorpRaider]

Attached are some Street comments on the quarter.

 

Started building a position today. Love the balance sheet capacity and mid-size market cap.

 

I'm with you on this one.  Even if they continue to post slow to no growth in North America, virtually every other market in the world, with the possible except of Japan is almost a "green field" for them to grow.  I do think there may be something to the comments from LTD's CEO about coach perhaps needing to moderate the factory stores as it may be hurting the brand.  It also seems like management is a lot more interested in buying back stock and hiking the dividend from the fantastic cash flow than going out and making a bunch of panic acquisitions.  I like that frankfort is hanging around as chairman (and largest shareholder).  Their policy regarding required ownership of at least 5 times annual salary in stock for senior managers is something which also appeals to me.

 

[xtreeq]

Found this writeup from Broyhill

Broyhill-Coach-Thesis_2013-03.pdf

[bmichaud]

I have a few questions for those with a position

 

- What kind of moat do you see in their business?

 

- What prevents another "Michael Kors" event?

 

- Are you taking a position from a fashion point of view which kinda requires you to follow the fashion trends or is it purely on a cheap quantitative basis?

 

 

The moat is a brand that A) has been around since 1941, B) is not subject to technological change - thus is unlike a "brand" such as Eastman Kodak that is subject to decay - and C) has likely weathered as much if not more competition than it currently faces - building 30% market share in North America over a 70 year period is far different than Blackberry inventing a new product that takes the market by storm for a number of years before the latest new gadget comes along.

 

What is good about KORS is that operating margins are in line with COH, ~30% on a LTM basis - I would interpret that as COH losing the marginal customer to the latest and greatest fashion versus the best price. I'd rather lose marginal COH customers to a competitor while maintaining pricing power with the core base. So who knows - KORS will likely continue to gain share, but if you tracked COH's market share back to its origin, I imagine they have faced similar threats before.

 

Tracking fashion trends may help from a trading perspective quarter to quarter, but I am banking on the luxury handbag market not changing much between now and 5 or 10 years from now.

 

 

An interesting comp is looking at Nike - while not directly comparable from a "luxury" stand-point, Nike typically commands a stiff price for its products even in the face of high quality competition from Under Armour....

 

Nike:

 

LTM YOY Sales GR: 4.32%

LTM EBIT Margin: 13.38%

LTM EBITDA Margin: 15.20%

LTM ROE: 25%

Calendar Year 2014 PE: 22.8X

 

Coach:

 

LTM YOY Sales GR: 3.91%

LTM EBIT Margin: 30.88%

LTM EBITDA Margin: 34.22%

LTM ROE: 47.15%

Calendar Year 2014 PE: 13.3X

[bmichaud]

Attached are some Street comments on the quarter.

 

Started building a position today. Love the balance sheet capacity and mid-size market cap.

 

I'm with you on this one.  Even if they continue to post slow to no growth in North America, virtually every other market in the world, with the possible except of Japan is almost a "green field" for them to grow.  I do think there may be something to the comments from LTD's CEO about coach perhaps needing to moderate the factory stores as it may be hurting the brand.  It also seems like management is a lot more interested in buying back stock and hiking the dividend from the fantastic cash flow than going out and making a bunch of panic acquisitions.  I like that frankfort is hanging around as chairman (and largest shareholder).  Their policy regarding required ownership of at least 5 times annual salary in stock for senior managers is something which also appeals to me.

 

You may prefer listening to them, but here is the transcript.

 

I've never been overly impressed with their conference calls, but I did like the honesty in the guidance in that they are not trying to forecast the turn performance generated by the new "lifestyle" strategy....unlike JCP, which continued to issue absurdly optimistic guidance.

 

While I wish they were more aggressive on the buyback, I do like the committment to returning cash to shareholders, which ends up being about 70% of annual earnings.

COH_CY3Q13_CC.pdf

[CorpRaider]

Thanks.  I listened to it this a.m.  I like hearing them for some reason; also its the first time I caught the new CEO (who sounds more like Lew than someone from LMVH, which is what I expected).  I can't believe they have such a small presence in europe and latin america.  I like it much better than Kors, because they can always retreat to the longer-term fine leather crafted goods (artisan presentations in cow flesh) model, which isn't dependent on getting the trend right.  Kors could go back to being mostly found on the racks of burling coat factor, ross and TJ maxx in a year, if they miss a step or two.  They can't go to Latin America and say "NYC, America, beef, cow flesh:  pay me $600."  Also, Mr. Market seems to be projecting continued gains by Kors and losses by COH to infinity and beyond, as he is apt to do.  I haven't bought any yet; feeling like a rash of downgrades might be coming and its unlikely the business starts to turn before next year, so I don't feel any need to rush.  Also, re: management I guess I've always had some respect for them in being long-term greedy since they threw a curveball past me by splitting COH off from SLE and requiring a tender of shares, instead of spinning it.  I don't think I had read Greenblatt's first book at that point and missed that indicator of a potentially great opportunity.

[Phaceliacapital]

Nike:

 

LTM YOY Sales GR: 4.32%

LTM EBIT Margin: 13.38%

LTM EBITDA Margin: 15.20%

LTM ROE: 25%

Calendar Year 2014 PE: 22.8X

 

Coach:

 

LTM YOY Sales GR: 3.91%

LTM EBIT Margin: 30.88%

LTM EBITDA Margin: 34.22%

LTM ROE: 47.15%

Calendar Year 2014 PE: 13.3X

 

Thanks for the reponse!

[hyten1]

my concern with coach is they will do a krispy kreme

 

expand too much and dilute their brand/image

 

coach for a long time was this small boutique brand, recently they have been expanding quite aggressively (relative to the past)

 

note: no position, just watching

 

EDIT: not only dilute their brand, but gradually playing more of the trend game (more and more fashion oriented products to attract more shoppers etc.), then again you have to to some degree they are a retailer of fashion oriented products :) sorry i am rambling, like i said still watching.

[LC]

My thoughts too, hyten. I believe they cut some corners in terms of product quality in order to expand so quickly. I'm not sure if this will permanently impact the quality of their brand. 

 

This is why I hate fashion companies: you aren't just analyzing business decisions and market dynamics, you also have to take into account how the fickle fashion consumer will interpret and feel about everything you do!

 

(that said, I'm currently looking at Tiffany's - go figure  ;D )

[Yours Truly]

I usually see long lineups at the outlet stores but at the retail outlet in malls, its pretty empty

 

I just wish their buyback plan was more aggressive than it currently is

[Palantir]

I agree with hyten. I can't understand what their strategy is - running boutiques side by side with outlet stores, on top of that they're keeping old school bags, while being trendy at the same time, but they're losing market share in the "trendy" side to MK and Kate Spade. Now they have aspirations of being a total lifestyle brand....too confusing.

 

I think there could be an investment case for this, but price is too high to justify taking on this kind of risk. Strikes me as a value trap unless there is an obvious catalyst - either fundamental realignment or new capital allocation views.

[bmichaud]

Stepping back and looking at this Icahn-style...

 

1. The brand has withstood the test of time

2. Management is doing its best to respond to the current competitive landscape WHILE returning significant amounts of cash to shareholders

3. Shareholders should let a management team, with actual expertise in the field itself, run the company unless there is an egregious abuse of shareholder capital

4. It is FAR easier to envision the future of the luxury handbag market 10 years from now than it is MSFT/AAPL/GOOG/FB/NFLX's future

5. A high ROC, high margin, cash-rich, capital-lite luxury brand should not trade at a market multiple let alone a capital goods/industrial/energy-type multiple

[CorpRaider]

Yeah a 20 P/E is more typical for this enterprise.  It looks like an absolute beaut of a business to me, in the absence of an irrational projection of Kors share gains to infinity.  People will likely still be sporting high quality cow flesh items well after the utilities are made obsolete by by distributed power generation and all fossil fuels are made worthless due to the cost advantage of renewables.  hah. 

[bmichaud]

;D

[Palantir]

Yeah a 20 P/E is more typical for this enterprise.  It looks like an absolute beaut of a business to me, in the absence of an irrational projection of Kors share gains to infinity.  People will likely still be sporting high quality cow flesh items well after the utilities are made obsolete by by distributed power generation and all fossil fuels are made worthless due to the cost advantage of renewables.  hah.

 

That's not a very rigorous view. Sure they might be sporting cow flesh, but which cow flesh? How do we know it will be from Coach, and how do you know what Coach's margins will be?

 

Buying a "cheap" stock works great when the firm's earnings power isn't related to its problems, in this case, earning power is expected to struggle going forward.....without some sort of change in capital allocation or successful fundamental shift, I don't see this going anywhere....so that brings on risk....how much do you want to be compensated for that risk?

[BTShine]

The 'it' girls are not buying Coach anymore (as far as I see).  Apparel, Accessories, etc. don't have the strong moat you'd like to see in a business.  My gut says that coach is on it's way out for the time being, though this is not a stock I'd putting money on long or short.

[bmichaud]

Nike margins and comps were hit in early 2011 and the stock was trading below its current price....NOT split-adjusted. In two years the stock has doubled and gross margins are actually lower now than they were back then.

 

Buying high-quality brands on sale is typically a good strategy over an extended period of time. Obviously one needs to figure out if the brand is impaired, and I would say a brand with 25%+ market share after 70 years of existence is rather strong.

 

It will be interesting to compare and contrast the status of COH's brand with Apple's 10 years from now....and/or Netflix/Twitter/Facebook/Microsoft....

[hardcorevalue]

I'll add my two cents on the brand issue. I agree, I think its dieing. The girl I'm dating is 22, asked her 'Michael Kors or Coach?', she said 'neither' with a fairly disgusted look on her face. Nearly every girl I've talked to recently has said something similar. It WAS a hot brand. It just seems like Coach has had its day (for now), I feel value guys like us well be the last to know as we are not in the target demo. I wouldn't be factoring in stable or increasing earnings in my base model.