Sunday Edition: Why I’m Excited About The New Coach

May 14, 2017

Sunday Edition: Why I’m Excited About The New Coach

Coach (NYSE: COH) isn’t the brand I remember from a few years ago.

The Coach I remember sold boring handbags that felt overpriced even when they were on sale at my local department store or outlet mall. I rarely gave them a second look.

If I told my 22 year old self that I’d now even, gasp, buy and regularly carry a Coach handbag, I think she’d be shocked and confused. But as a self-professed “fashion girl,” the Coach I have been seeing for the last couple of years has had me excited.

From a purely product perspective, they’ve put more focus on better design and higher quality which in my mind has justified their bags’ price-point. They’ve also been very smart about getting their products in the hands of celebrities and fashion influencers whose style I admire, ensuring I don’t forget who they are as a brand now and that I continue to ascribe a higher value to what they offer.

From a business perspective, the brand is smart. They must have realized they’d die a slow death if they continued on the path of outlet mall staple.

They promoted a new CEO in 2014, Victor Luis, and hired a new creative director the same year. That year marked a new beginning for Coach and a new commitment to restoring the image of the 76-year old brand that had been corroded by years of heavy discounting and over-expansion. Since then, they’ve began pulling their products from hundreds of department stores where they were always on sale, they’ve closed poorly performing stores, and have stopped relying on discounting.

They’ve taken some short-term losses through all of this, but they’ve also rebuilt their image as a luxury brand and people are beginning to pay full price for a Coach bag, just as they would for Gucci or Louis Vuitton.

In fact, sales of products north of the $400 price point made up more than 55% of the company’s handbag sales in North America, which is up from 40% a year ago. I’d say that’s progress.

But the real end-game for Coach seems to be not just re-asserting itself as a true luxury brand, but also to build a conglomerate of American luxury purveyors the likes of which can be found in Europe’s LVMH Moet Hennessy Louis Vuitton SE and Kering SA.

In 2015, Coach bought luxury shoemaker Stuart Weitzman, and just this week the company announced its purchase of Kate Spade for $2.4 billion.

But this isn’t a Liz Claiborne-style conglomerate of one-hit wonders like Juicy Couture. Coach has taken a slow approach to deals with brands that broaden its customer base—both Stuart Weitzman and Kate Spade bring millennial buyers with them—and has been just as smart about executive hires.

The technical picture looks interesting as well. Let’s take a look.

Source: Trading View.

What we’re seeing in the chart above is an inverse head and shoulders formation. We discussed a head and shoulders formation in last week’s article about AMD. You can revisit that article here.

An inverse head and shoulders is formed by a stock’s price falling to a trough (the first shoulder) and then rising, then falling below the former trough to form the head before rising again and finally, the price falls again though not as far as the second trough, the head, creating the second shoulder. This formation typically marks a bottom and reversal of a downtrend.

Once the final trough forms, the price rises toward the resistance line created by the tops of the previous troughs, also known as the neckline in this pattern, confirming the beginning of a new uptrend.

As we can see in COH’s chart, the price has already broken-out above this neckline and is on its way up.

To get a minimum price target for this new uptrend, you’d measure the distance between the bottom of the head and the neckline and then add that number to the price above the neckline. For COH, that gives us a minimum target of around $60, which is a 33% gain from where the price sits today (Friday) at $45.

I say ‘minimum target’ because an inverse head and shoulders pattern often leads to a total reversal of a downtrend and the beginning of a new long-term uptrend. This beginning of a new uptrend is further confirmed to me by the presence of a breakaway gap and the following measuring gap that formed this past week.

Source: Trading View.

Gaps occur frequently in financial markets. Whenever the price of a stock moves without any trading taking place—between one day’s close and the next day’s open for example—a gap occurs.

When gaps occur in the same direction a trend has been proceeding, it marks increased intensity in the movement and they usually form because of an important event. For COH, that important event was it’s announcement of the Kate Spade purchase which is marked above as the breakaway gap.

A breakaway gap can be described as when the price breaks away from a non-trending range and into a trending pattern. A breakaway gap like the one we can see with COH this week is considered to be a stronger move out than a non-gap move out.

The gap that we can see just above the neckline of our inverse head and shoulders is a measuring gap.

A measuring gap typically occurs in the middle of an existing trend when traders that have sat on the sidelines waiting for a more profitable time to enter the trend, such as after a retracement has been hit, enter the trade. In COH’s case, I believe the measuring gap has occurred much earlier in the trend after the price hit the neckline of our inverse head and shoulders pattern confirming a new uptrend.

In any case, there’s still plenty of upside for COH and I believe we could see the price extend far beyond the $60 minimum price target indicated by our inverse head and shoulders.

As for me, my current favorite handbag is beginning to fall apart and I need to do some shopping for a replacement. A Coach handbag might just make the cut, but don’t tell my 22 year old self.