Two Ways to Bag Big Bucks on Holiday Sales

Coach’s recent results indicate luxury retail may have holiday sales in the bag. The high-end purse maker reported earnings for its September quarter last week. The stock rose 2% despite missing estimates by a few pennies. Investors, conditioned to be chronically disappointed by retailers’ earnings, found some silver coins in the lining of the release.

We think the company’s strategy of removing product from unproductive department stores and introducing higher priced bags is a move in the right direction. The good news for investors is that stock pickers can make money from both ends of this trade—buying the retailers executing with full price merchandise and shorting those supplying the department stores. Subscribers to Profit Catalyst Alert have already enjoyed some successful trades buying puts on a handful of companies reliant on department stores for their fortunes.

(Oh, and by the way, we just closed a call position today that made investors 100% in 10 days.)

Coach’s revenue increased a teensy 1%, but a big part of that decline is due to the company discontinuing distribution to many department stores. The company removed its bags from 120 department stores this quarter and will take its door count down by another 130 in the spring. Lack of exciting product and oversized formats have left department stores desperate for customers. These dwindling sales and profits are forcing them to rationalize their existence and concluding that many need to be closed.

More than half of Coach’s sales were from bags priced higher than $400, up from 30% of the total one year ago. Comp sales, a measure of how sales grew without the impact of new stores, rose 4%, only the second positive comp number in almost two years. Lower and less frequent markdowns showed up as higher profits despite the small revenue increase.

While Coach may be one of the first high-end brands to see improving full-priced sales, consumer spending and wage data indicate others may enjoy the spoils of more profitable sales over the holiday season.

The Bureau of Labor Statistics recently reported that consumer spending for September rose .5%, higher than expected and the biggest gain in three months. This is particularly bullish behavior considering the anxiety most have suffered over the presidential election. The most recent data for wage growth showcased a 3.8% jump in September. Year to date wages have risen an average 4% following a large 5% jump in 2015. These back to back improvements in pay are helping consumers grow more confident that higher wages are here to stay.

We’ve been long another handbag retailer following the same game plan as Coach. It’s cutting back distribution in department stores and introducing higher priced, higher quality bags. As with any strategy involving a big product shift, it is taking some time for sales of the more profitable products to outweigh the drop from reduced distribution but profits are heading in the right direction.

While the shift to higher profits is just starting to unveil itself in these companies, Coach’s stock’s bullish move in response to a mediocre number is a good indicator that a stock is oversold and expectations are reasonable.  A set of Coach’s peers is trading at just 16 times forward earnings versus a historical average of 20. After coming off of a miserable 2015 holiday season some of these luxury players might see their stockings full come January.

We’ll be studying up and looking for more luxury purveyors making the right moves to succeed in the critical holiday season while digging deeper into those which might be left with a lump of coal.

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