Coach: Victor Luis could be the next Ron Johnson

I have a few speculative out-of-the-money puts on COH.  The thesis is simple.  Coach’s same store sales dropped 21% in North America (press release).  This is an outlier.  It is highly unusual for same store sales to drop so fast.  It is a sign that the CEO will eventually destroy the company if left unchecked.

I hold the view that retail is largely management-driven and that management’s skill rarely changes.  As long as Victor Luis is the CEO, Coach will be doomed.  He is probably a wonderful human being and I don’t want to disparage him.  However, retail is an extremely competitive industry where it’s about survival of the fittest.  What I predict is that Coach will continue to deteriorate until the board of directors is eventually forced to fire Victor Luis.  If Lew Frankfort (former CEO and current chairman) is unusually good as a CEO and Victor Luis unusually bad, reversion to the mean suggests that the succeeding CEO would be merely average.  I’ll have to play it by ear whether or not I need to cover my puts after Luis is fired (if he were to be fired).

Unlike JC Penney, Coach has close to no debt.  Debt will not magnify Luis’ skill (or lack thereof).  This may prevent COH from getting as ugly as JCP.

Some context

The broad strokes are:

  1. There has been a huge amount of churn in executive positions.  To some degree this reminds me of Blackberry, where virtually all of the top executives left as the founders were leaving.
  2. Luis has largely said that Coach remains committed to its current strategy.  So far the strategy has been an outlier in terms of how bad it is.
  3. Lew Frankfort, the CEO, had been planning his succession for a while.  I suspect that he gave greater control to Luis before the succession plan was officially announced.
  4. Coach’s same store sales have been in a downtrend in the past few quarters.

Jan. 10, 2013 – Coach replaces its CIO (press release).

Feb. 14, 2013 – Coach announces succession plan

Feb. 27, 2013 – Coach announces a large shake-up in its creative team (press release).  2 new roles were created for Global Environments and filled by external candidates.  Sandra Hill, who joined Coach in January 2013, was appointed responsibility over all women’s products.  Coach announced that Jeffrey Uhl was promoted to his current position as SVP Men’s Design in September 2012.

June 24, 2013 – Coach’s head designer / creative director is replaced with Stuart Vevers (press release).

July 30, 2013 – The COO and president of North America leave (press release).  The press release also talks a little about Coach’s new “brand transformation” strategy.  Coach is trying to broaden its brand into a “lifestyle” brand where it will sell more accessories and other non-handbag items.  It will also try to target the male market.

Jan. 2014 – Victor Luis becomes CEO.

 This is not a high conviction trade for me

I don’t understand retail as much as I would like.  I don’t have as much experience with retail stocks as I would like.To some degree, I feel more comfortable betting on scenarios that will resemble the past and on reversion to the mean.  I’m used to buying on dips and selling on rallies.  This trade is quite different.  I am betting that the future will be dramatically different than the past.  I am betting against a beaten down stock near its 52-week lows.  I doubt that Benjamin Graham would approve of this trade.

Links

My write-up on JC Penney.

Retail and reversion to the mean.

Quality businesses on my radar – I suppose that post of mine kind of makes me look like a donkey.  I list Coach as a quality business due to its strong brand.  Clearly, I am now reversing my position.  It seems like the strength of Coach’s brand can disappear rather quickly.  (Nowadays I don’t think that strong brands in apparel are ever durable.)

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6 thoughts on “Coach: Victor Luis could be the next Ron Johnson

  1. My understanding Luis was head of the International unit before becoming CEO and that division was/is performing very well and that newly redesigned merchandise is coming on this Fall. Any thoughts?

    • He did do a good job in his previous role. But… Coach’s same store sales are what they are. Whatever he is doing isn’t working. I wish I knew why his talents don’t translate over… but I don’t.

      All fashion retailers will have a constant flow of newly designed merchandise so they all gotta keep running to stay in the same place.

  2. COH is an excellent operator facing competitive threats in a moatless industry. it’s gross margin and consistency were excellent prior to 2012. management is actually good operationally, but Lew messed up strategically a few years back by destroying the brand.

  3. I think retail needs good management, but I also think a lot of it is luck based. It’s hard to bring back a retailer that has fallen out of favour, though I have seen a couple of cases, its more the exception than the rule.

    Im investing in JD sports at the moment, they have two chains, JD and Bank. It has great management and JD is doing amazing, posting like for like sales growth every year. Bank however is loss making and seeing LfL sales declines. Same management but imo Bank is just not a great business.

  4. Pingback: Michael Kors (KORS) – Are these LEAPs cheap? | Glenn Chan's Random Notes on Investing

  5. Pingback: Coach’s brand transformation fake-out – Glenn Chan's Random Notes on Investing

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