>>> Coach reports EPS in-line, misses on revs; reaffirms FY17

--> COH +3.6% pre-open 41k shares traded

Coach reports EPS in-line, misses on revs; reaffirms FY17
  • Reports Q1 (Sep) earnings of $0.45 per share, in-line with the Capital IQ Consensus of $0.45; revenues rose 0.7% year/year to $1.04 bln vs the $1.07 bln Capital IQ Consensus. Net sales for the Coach brand totaled $950 million for the first fiscal quarter, an increase of 1% on a reported basis and a decrease of 1% on a constant currency basis. As expected, the strategic actions in the North America wholesale channel impacted sales by about 150 basis points.
    • Total North American Coach brand sales decreased 3% on both a reported and constant currency basis to $545 million.
    • International Coach brand sales rose 7% to $395 million on a reported basis from $369 million last year and 3% on a constant currency basis. Greater China sales were approximately even with prior year in dollars and increased 5% on a constant currency basis driven by double-digit growth and positive comparable store sales on the Mainland offset by continued weakness in Hong Kong and Macau. In Japan, sales rose 11% in dollars and decreased 7% in constant currency impacted by a decline in Chinese tourist spend, lapping last year's dramatic increase.
    • Sales for the remaining directly-operated businesses in Asia rose low-single digits in dollars and constant currency, while Europe remained strong, growing at a double-digit pace.
  • Co is maintaining its fiscal 2017 outlook as outlined in August.
    • Co continues to expect revenues for fiscal 2017 to increase by low-to-mid single digits, including an expected benefit from foreign currency of ~100-150 basis points based on current exchange rates. In addition, the Company is maintaining its operating margin forecast for Coach, Inc. of between 18.5-19.0% for fiscal 2017. This guidance incorporates the negative impact of both Stuart Weitzman and the strategic decision to elevate the Coach brand's positioning in the North American wholesale channel, including a reduction in promotional events and the closure of about 25% of doors. Interest expense is still expected to be in the area of $25 million for the year while the full year fiscal 2017 tax rate is projected at about 28%.
    • Taken together, the Company continues to project double-digit growth in both net income and earnings per diluted share for the year (consensus +9.1% to $2.16).

Coach On Call
  • Continues to expect double-digit sales increase in its UK business
  • Renovated and opened 40 locations during the quarter, in-line w/ its target to end year w/ 700 stores in updated format
  • Estimates the North American premium men's and women's backend accessory market was flat to up lsd in the September quarter,
    • Co believes impacted by negative trends seen in the US department store space
  • Brick and mortars in North America rose ~4% driven by tickets and conversion while traffic was down modestly
  • Declines in Chinese stores traffic more than offset by other nationalities
  • Coach brand operating margin increased 200 bps Y/Y to 17.9%
  • Continues to expect Coach brand directly operated square footage to grow lsd globally
    • Internationally, co expects msd increase in sq footage led by growth in Europe and msd increase in mainland China
  • $570 mln of inventory at end of quarter, -5% Y/Y
  • No strategic acquisitions planned imminently
  • Expects dividends to grow in-line w/ prior year's operating income growth
  • Continues to assume a lsd comp for the Coach brand in North America
  • Continues to expect Capex to be ~$325 mln in FY 17

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance:
  • INST -19.4%, ARNC -13%, NLS -11.4%, MCEP -10.8%, BKD -9.9%
  • LB -8.2%, (L Brands lowers Q3 EPS guidance ahead of its Investor Update Meeting; sees October same store sales +1% vs +LSD growth guidance )
  • RAIL -6.3%, TEX -5.6%, PBI -5.3%, STRL -4.3%, ALLT -3.7%, ETN -3.1%, MPWR -3%, HCLP -2.7%, ( Chief Operating Officer Jefferies Alston, III resign)
  • CMI -2.6%, DKL -2.4%, EMR -2.3%, HCP -2.2%, PFE -2.1%, OXY -1.9%, BP -1.7%
Other news:
  • NVCN -39.2% (announces that Judge Burroughs upheld the jury's verdict and $70 mln award against the co and awarded $21 mln in enhanced damages to that award)
  • NETE -3.5% (thinly traded; discloses that it, Paystar, and Nexcharge have terminated the binding letter of intent dated July 21, 2016)
  • EFC -2.3% (ticking lower, announces third quarter dividend of $0.45 per share, down from prior $0.50/share)
  • BABA -1.9% (insider might be helping SEC with investigation, according to NY Post)
Analyst comments:
  • AMFW -3.2% (downgraded to Equal Weight from Overweight at Barclays)
  • WM -0.9% (initiated with a Sell at Goldman)
  • MA -0.7% (downgraded to Neutral from Buy at Guggenheim)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance:
  • DRRX +16.1%, IFMI +12.5%, RYAM +10.6%, CGNX +7.9%, OSK +6.5%, AMKR +5.6%, RDCM +4.7%, ADM +4.2%,RDS.B +4.1%, AEIS +3.8%, INCY +3.6%
  • RDS.A +3.5%, LMNX +3.3%, CIE +2.8%, ORC +2.6%, EXAC +2.5%, TSO +2.4%, IDTI +1.9%, MOS +1.8%, AUDC+1.7%, THC +1.4%, CPS +1.3%, GPP +1.2
  • GPP +1.2%, SNE +1.2%, K +0.8%, COH +0.6%, HW +0.6%, TRI +0.6%
M&A news:
  • OCLS +54.5% ( sells its Latin American-related assets to Invekra S.A.P.I. de C.V. of Mexico for $19.5 mln in cash)
  • ANGI +9.7% (co announced it is seeking strategic alternatives; also reported earnings)
Select Macau gaming names showing strength after Gaming Inspection and Coordination Bureau reported October gross gaming revenue +8.8% YoY:
  • WYNN +2.2%, LVS +1.9%, MGM +1.3%
Select metals/mining stocks trading higher:
  • SLW +2.6%, AKS +2.5%, GG +2%, BBL +1.9%, ABX +1.9%, GDX +1.9%, SLV +1.8%, FCX +1.5%, RIO +1.4%, BHP+1.2%
Other news:
  • DRYS +25.8% (sold five of its Panamax vessels for an aggregate gross price of $29.4 million)
  • LION +2.4% (Fidelity Southern will replace Monster Worldwide in the S&P SmallCap 600 after the close of trading on November 2)
  • DLNG +2% (Dynagas LNG Partners enters charter agreement with Gazprom Marketing & Trading Singapore for the employment of the 150k cubic meter steam turbine LNG carrier Clean Energy)
  • BBRY +1.7% (BlackBerry signs agreement with Ford Motor Company for expanded use of BlackBerry's QNX and Security Software)
  • CEMP +1.5% (receives a $10 mln milestone payment from Toyama Chemical, triggered by Toyama progressing to Phase 3 studies with solithromycin in Japan)
  • VRX +1% (following late sell-off on reports that former exec might be under criminal investigation; co confirms has been fully cooperating with authorities throughout the investigation and in frequent contact/continue to cooperate with US Attorney's Office for the Southern District of New York )
  • CBR +1% (light volume- Board has engaged a strategic adviser to assist in exploring strategic alternatives)
Analyst comments:
  • TWLO +3.2% (initiated with an Outperform at Oppenheimer)
  • MPC +1.7% (upgraded to Neutral from Sell at UBS)
  • CVX +0.8% (upgraded to Overweight from Equal-Weight at Morgan Stanley)

(MS) Shire PLC (SHP.L): 3Q 16 1st Take: a soft quarter

3% sales miss (hematology orders phasing), 4% EPS miss ($3.17). All vs Axis consensus, 3Q sales came in 3% below ($3,315m, up 111% CER) mostly due to BXLT (7% miss) hurt by the timing of large International orders - c 50% of sales - in hematology (10% miss) and to a much lesser genetic diseases (2% below; 12% miss for Cinryze with destocking and supply constraint) despite solid Internal medicine (10% beat) and neuroscience (2% beat)

 

Shire PLC (SHP.L)

3Q 16 1st Take: a soft quarter

Read Full Report

(PDF: 8 Pages)

Europe

Stock Rating   Overweight

Price Target   5,600p

 

Nicolas Guyon-Gellin, Vincent Meunier, Patrick Chen

 

November 1, 2016

First full quarter of BXLT combination impacted by hematology one-offs, limited synergies and dilution as expected. Fast growing rare disease platform with self-help, yet at a 20% sector P/E discount; Overweight.

3% sales miss (hematology orders phasing), 4% EPS miss ($3.17). All vs Axis consensus, 3Q sales came in 3% below ($3,315m, up 111% CER) mostly due to BXLT (7% miss) hurt by the timing of large International orders - c 50% of sales - in hematology (10% miss) and to a much lesser genetic diseases (2% below; 12% miss for Cinryze with destocking and supply constraint) despite solid Internal medicine (10% beat) and neuroscience (2% beat). Adjusted EBIT came in 6% below ($1,254m, 37.8% margin, 120bp miss) despite good cost containment (lower COGS/R&D, higher SG&A) and EPS 4% below ($3.17; lower financials and tax rate). Of note, encouraging Xiidra (dry eye) sales ($14m vs cons $10m) reflected strong uptake despite the distortion from 30-day free promotion and inventory building.

FY16 guidance reiterated (consensus in line), focus on hemophilia market access and Xiidra. As anticipated, Shire reiterated guidance of $10.8-11bn sales (MS $10.8bn; consensus $10.9bn) and $12.70-13.10 core EPS (MS $13.04; consensus $12.97). During the conference call we expect investors to focus on 1/ pricing risk in hemophilia after Express Scripts comments yesterday 2/ Xiidra early days feedback and 3/ Cinryze US supply constraints expected to be fixed by early 2017. Of note, as widely anticipated after a bumpy development, Shire terminated high risk SHP610 for Sanfilippo A after p2b failed and confirmed SHP643 (angioedema) p3 results in 2Q 17.

A unique fast growing rare disease platform with self help, yet at a 20% sector P/E discount. The Baxalta transaction significantly increased Shire's exposure to long-duration orphan drugs (c ⅔ of revenues), adding critical mass, and de-risking current white-pill cash cows with further portfolio optimisation optionality. While Shire's superior growth profile (12% revenue/EPS 5-year CAGR) derives partly from BXLT synergies and deleveraging, we find the current 20% 12-month forward sector P/E discount inappropriate in light of Shire's proven track record at integrating companies, leadership in rare diseases and attractive risk-reward. Next major catalyst will be 10th Nov investor day.

Conference call at 2.00pm GMT, UK 0808 237 0030; US 1 866 928 7517; password 42020034

3Q results variance table vs MS and consensus

Source: Axis consensus, Company data, Morgan Stanley Research estimates

FY 16 guidance vs MS and consensus

Source: Axis consensus, Company data, Morgan Stanley Research estimates