These Retail “Screw-ups” Could Turn Things Around This Year

Two Contrarian Plays for the Retail SectorThe retail sector can be a brutal place for retailers at all times. Think about it. You have to convince the consumer to buy your stuff instead of a rival brand’s. It’s all about the product, image, and marketing. That’s why shoppers look to brand-name items versus no-name products. Are the brand-name goods better? Perhaps, but is it enough to justify the price differential?

 Yoga pants maker lululemon athletica inc. (NASDAQ/LULU) is currently at a 52-week low driven, in part, on poor press and rising infringement in its core market. But with sales estimated to grow 16.1% in fiscal year (FY) 2014, followed by 16.3% growth to $1.85 billion in FY15, according to Thomson Financial, the numbers actually don’t look that bad. For the speculator, it may be an opportune buying opportunity to consider this retail sector stock.

lululemon athletica Nasdaq Chart

 Chart courtesy of www.StockCharts.com

 At this price level, the upside reward for Lululemon appears to be greater than the downside risk. The company just needs to deliver results and keep its founder, Chip Wilson, from saying anything stupid in public. In addition, the company needs to address its quality-control issues, especially as cheaper competitive goods surface in the retail sector. When you buy Lululemon, the superior image and quality should be what you are paying for; if the company can execute on this simple retailing strategy, we could see strong gains for Lululemon in the retail sector.

 And then there’s Coach, Inc. (NYSE/COH). My wife loves this place, especially its discount outlets that are scattered across America. The problem with Coach has been the competition, specifically the rise of Michael Kors Holdings Limited (NASDAQ/KORS), which continues to be my top pick in the luxury-brand retail sector. (Read “My Favorite Pick Among the Luxury Brand Stocks.”)

Coach, Inc. NYSE ChartChart courtesy of www.StockCharts.com

 Now, that doesn’t mean Coach is dead in the water. The company is currently facing some execution issues in the retail sector that clearly are due, in part, to the emergence of Michael Kors.

 In the fiscal second quarter, Coach delivered a quarter that it probably wishes wasn’t the case. Quarterly sales fell to $1.42 billion, down six percent from the year-earlier quarter. Earnings in the quarter also fell to $1.06 per diluted share, down from $1.23 per diluted share and well short of the consensus $1.11 per diluted share provided by Thomson Financial.

 The company blamed the weak sales on the North American retail sector, which saw a decrease of nine percent year-over-year. International sales edged up two percent, or 11% if you adjust the currency to constant dollars. Of course, strong sales in China helped to avoid an even worse quarter.

 If you are looking for an aggressive trade, Coach is also trading near its 52-week low and could be a buying opportunity in the retail sector if the company can convince shoppers to bypass the Michael Kors stores and go straight to Coach. It won’t be easy, but I wouldn’t write off Coach just yet.

 I would look to play Coach via buying call options. For example, allowing the company a year to turn things around, you can buy calls with a January 2015 expiry. The in-the-money $40.00 and $45.00 calls on Coach with a set timeline on January 17, 2015 may be worth a look.