Large Cap Watch List member Coach (COH) shares traded down sharply after the company Reported Third Quarter Earnings:
Coach, Inc., a leading marketer of modern classic American accessories, today announced an increase of 50% in earnings per diluted share on a continuing operations basis to $0.39 for its third fiscal quarter ended March 31, 2007, up from $0.26 per diluted share a year ago on the same basis. During the quarter, the Company ceased operations of its Corporate Accounts business in order to better control the location and image of the brand where Coach product is sold. Including the contribution of these discontinued operations, earnings per share rose 42% to $0.40 as compared to $0.28 reported a year ago, ahead of analysts’ expectations of $0.38.
Investors were disappointed in guidance that was lower due to discontinuing the Corporate Accounts business. According to the company:
The company now estimates fiscal 2007 sales from continuing operations of at least $2.6 billion for the full fiscal year ending June 30, 2007, an increase of 28% from the $2.035 billion in the prior year, and earnings per share of $1.67, or up 40% from last year’s $1.19 on the same basis. This compares with the analysts’ current consensus of $1.72, which Coach estimates included a $0.10 contribution from discontinued operations, resulting in an adjusted consensus estimate of $1.62 on a continuing operations basis for FY07. The company’s guidance for the fiscal year reflects sales of $640 million and earnings per share of $0.40 for the fourth quarter, up 36% from the $0.29 reported for the fourth quarter in fiscal 2006.
For fiscal 2008, on a continuing operations basis, Coach projects sales growth of about 20% to at least $3.1 billion and earnings per share growth of at least 21% to at least $2.02. This compares with the analysts’ consensus of $2.09, which Coach estimates included an $0.11 contribution from discontinued operations, resulting in an adjusted consensus estimate of $1.98 on a continuing operations basis for FY08.
A six percent decline in the share price given a 3.5% decline in projected earnings might not seem an excessive overreaction. However, we think focusing on next year’s earnings may be a mistake. When is the last time you heard of a company voluntarily giving up sales? It doesn’t happen often, and when it does it either signals that the company is in deep trouble or is in a position of strength. In this case, it clearly appears to be the latter.
With sales growing more than 20% annually at full price, why should the company discount its products and dilute its brand? The answer is that it shouldn’t - and management made a tough decision to reduce today’s earnings to protect the brand. With $1 billion in cash and virtually no debt there is little doubt of the company’s strength.
In short - we think investors selling Coach on this news probably made a mistake.
