With option expirations last Friday, many of the options I had written have expired. Generally speaking that was a good thing for me, as it meant I was able to keep the option premium. It also meant that I had to reload many of the positions, which I did yesterday.

There were a couple of situations in which I would have done better by simply buying or selling the stock outright rather than selling the options. In other cases, I would have fared worse. Over the long term, I think the option writing strategy will be more rewarding and less risky than a stock-only strategy.

The new option positions I have written (all expiring in June) are:

• Coach (COH) $35 puts
• Hansen Natural (HANS) $30 calls
• Radioshack (RSH) $15 puts
• Ansys (ANSS) $45 call options
• Starbucks (SBUX) $17 call options
• Adobe (ADBE) $45 call options
• Ceradyne (CRDN) $40 put options
• Nutrisystem (NTRI) $20 put options

I also sold outright a position in Itron (ITRI), which was too few shares to cover with a call option. I had a nice profit on the shares, but they have been acting punk lately and I’m a little worried about the potential for new smart meter competition. I might be interested in getting back at a cheaper price.

Disclosure: Obviously, at the time of publication William Trent has a financial position in all of the companies mentioned in this article with the exception of Itron.

Disclosure: Author is long Starbucks (SBUX) at time of publication.

Leather goods maker Coach, Inc. (COH) announced an increase of 19% in earnings per diluted share to $0.46 for its third fiscal quarter ended March 29, 2008, up from $0.39 per diluted share a year ago. The results were slightly ahead of expectations on both the top line and the bottom line.

At first glance, my only significant concern with the report is a faster rise in inventories than in sales. This could indicate sales running below expectations, the potential for future inventory clearance at reduced margins, or a number of other potential operational issues.

When I said Coach shares were selling on the bargain rack Coach had $900 million in cash and virtually no debt, so even the toughest recession should be survivable. With an enterprise value of just under $10 billion and $679 million in free cash flow (cash from operations less capital expenditures) over the last 12 months, its free cash flow yield of 6.8% offers a 400 basis-point premium over the current 5-year Treasury. That would almost justify buying the shares even if no growth were expected.

Since then cash has come down, apparently due to accelerated share repurchases. It repurchased and retired 11,349,802 shares of its common stock at an average cost of $28.85, spending a total of $327 million during the quarter.

Disclosure: At time of publication, William Trent has written put options against shares of Coach (COH)

When I said it was too early to buy NBTY (NTY), unfortunately I didn’t mean a day or two early. The stock was up nicely this morning after an analyst upgrade.

Analyst Upgrades NBTY, Stock Surges: Financial News – Yahoo! Finance

Shares of NBTY Inc. surged Wednesday as an analyst upgraded the nutritional supplement maker, citing its solid sales and an attractive stock price.Edward Aaron of RBC Capital Markets said he is more comfortable with his NBTY estimates now partly because the Bohemia, N.Y.-based company recently reported improved sales. Last month NBTY said its January sales rose 6 percent, as strong wholesale results offset a weak retail environment.

As I said in the original article, though NTY looks fairly cheap so do most retailers and consumer companies. Unless we can get through another quarter without a significant earnings miss or downward revision it just seems too early to call a bottom here.

I still think there is better opportunity in names like Tupperware (TUP) or Coach (COH).

Disclosure: At time of publication, William Trent has no position in the companies mentioned.

This article was originally published for RealMoney on January 30, 2008.

Despite the rally over the last couple of days, Jim Cramer says retail is not the right play here. We are probably early in the consumer slowdown, so expecting an immediate snap back seems wishful thinking.

On the other hand, there do seem to be some compelling valuations out there. The trick is in deciding where to call the bottom, or in finding stocks where expectations have sunk so low that they may already be discounting the worst case scenario.

With that in mind, I decided to look in the bargain sale rack for retailers that have seen their estimates slashed, but that offer good valuations in terms of earnings and cash flow. One that quickly caught my eye is Coach (COH).

Despite a solid track record of beating estimates in recent quarters, analysts have been aggressively trimming estimates over the last month. The company has far too much North American exposure for most people’s comfort, though a flagship store opening later this year in Hong Kong should accelerate penetration to the Chinese market, which the company expects can quickly become its third major region.

Consensus expectations for the year ending in June have fallen from $2.07 to $2.04, while the June 2009 expectations have fallen from $2.46 to $2.35. As a result, Coach’s Zacks rank (a measure of momentum in earnings revisions) fell two notches to 5 last week. This is the lowest possible score, signifying that Coach’s earnings momentum is among the worst 5% of all companies tracked.

Sometimes, though, being among the worst means things can only get better. The company reiterated its prior guidance of $2.06 for this year, and investors have rewarded it with a 25% rally this week.  Nonetheless, the shares are still down 45% from the 52-week high.

Last year Coach discontinued promotional corporate sales, and that announcement marked the high point for the stock. In hindsight, investors were right to sell. But I still think the move was a sign of strength.

For the six months ended December 29, 2007, net sales were $1.7 billion, up 24% from the $1.3 billion reported in the first six months of fiscal 2007. When higher margin sales to consumers are growing more than 20% annually, why should the company discount its products and dilute its brand? The answer is that it shouldn’t – and management made a tough decision to reduce earnings in the short term to protect the brand.

As to valuation, the rally hasn’t taken Coach even close to overvalued territory. At 16.3x trailing earnings and 12.2x FY09 estimates, the P/E multiple easily seems justified for a company expected to average 18% annual growth over the next five years.

Coach has $900 million in cash and virtually no debt, so even the toughest recession should be survivable. With an enterprise value of just under $10 billion and $679 million in free cash flow (cash from operations less capital expenditures) over the last 12 months, its free cash flow yield of 6.8% offers a 400 basis-point premium over the current 5-year Treasury. That would almost justify buying the shares even if no growth were expected.

The company has also been putting its cash flow to good use. During the second fiscal quarter, it repurchased and retired 20,480,927 shares of its common stock (more than 5% of the total shares outstanding) at an average cost of $34.51, spending a total of $707 million. At the end of the period, $661 million was available under the company’s current repurchase authorization, which was put into place in early November.

With the shares now more of a bargain than they were then, I’d expect that authorization to be used up quickly. And when I look under the covers, I come away thinking management knows what they are doing by buying back the shares now.

Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.

Embraer (ERJ), the world’s leading manufacturer of commercial jets up to 120 seats, recorded net sales of US$843.4 million, in the first quarter 2007 (1Q07) and net income of US$26.2 million, equivalent to diluted earnings per ADS of US$0.1412. Analysts had been expecting the company to earn $0.40 on $853 million in sales. As was reported a month ago, the miss resulted from production issues.

Due to difficulties with the supply chain of the EMBRAER 170/190 family, Embraer delivered 25 aircraft during the first quarter of 2007, compared to 27 deliveries during the same quarter in 2006. Furthermore, the Company’s industrial costs increased as a result of longer production lead time and higher man/hour labor costs in its production process, including those related to overtime work, in order to achieve the scheduled deliveries.

Given that the shares rallied when the company reported the initial production levels last month, investors may fairly wonder why the shares are dropping on today’s news. Obviously the report last month was just aircraft – not revenue or earnings. And analysts were able to get fairly close to the right revenue number but still fell way short on earnings. In part it is likely that the estimates didn’t properly reflect operating leverage – it is something all too frequently underestimated. However, a good part of it was related to the efforts made to stem the production issues. As the company reported:

In order to be better prepared for the expected production ramp-up in the coming quarters, Embraer has hired approximately 2,000 employees, since January 2007 all of which engaged in a training program. Since the costs
related thereto are accounted for as “industrial costs”, the Company’s gross margin for the quarter was adversely affected. Most of the new employees will be working a third shift, to be fully implemented during the third quarter of 2007. The training program can last up to 90 days, and all employees are coached by experienced professionals.

It sounds expensive, and clearly it was. It is also highly unlikely that they caught Embraer management entirely by surprise. It would have been a good idea for the company to give a heads-up regarding the extra costs when they reported the production levels in April.

Sometimes it is easy to get too caught up in a few related names and not see what is going on in the broader economy. With the concerns over consumer spending, we decided to look at a few companies that might have a glimpse into the consumer spending habits. Not wanting to get too caught up in a particular segment (luxury vs. discount, for example) we picked from recent conference call reports to find companies that provide primarily small luxuries or large-ticket items. Here’s what they have to say.

AutoNation (AN) says the housing market weakness is spilling over into auto sales.

We attribute our underperformance to the industry to the weighting of our business in California and Florida.

To reiterate Mike Jackson’s earlier point, our business in these two states accounts for 50% of our unit sales as compared to 20% for the industry at large. CNW estimates that California and Florida combined were down approximately 13% for the industry. Our decline for these two states combined was in line with the industry.

We anticipate the softness in California and Florida will continue as their housing markets struggle. With reduced volume having an impact on all segments of our business, work on controlling variable expenses, specifically advertising and compensation, along with aggressive inventory management takes on increased importance.

(Excerpt from full AN conference call transcript)

But it is not affecting jewelry, according to Blue Nile (NILE).

I think it is quite a statement about the stature of the Blue Nile brand that so many people trust us with such exceptional purchases. Some of the most impressive sales this quarter included a 5-carat engagement ring for $140,000 and a 6.5-carat pair of diamond earrings for $130,000. Our most memorable order during the quarter was a $195 garnet pendant that was shipped to a customer in Texas in late March. This order was very special to us because as it shipped, the company passed $1 billion in cumulative revenue since the inception of the company less than eight years ago. This was a tremendous milestone for the company, and I want to congratulate all of our employees on this accomplishment.

(Excerpt from full NILE conference call transcript)

Caffeine addicts also appear unfazed, spending a bit more and a bit more frequently according to Starbucks (SBUX).

We opened 147 new stores during the quarter, bringing our store count outside the U.S. to nearly 4,000 locations in 38 countries. And we delivered comparable store sales growth of 7% — 5% transaction, 2% ticket.

(Excerpt from full SBUX conference call transcript)

Hilton (HLT) says people are still staying in nice places.

For the entire company, things are going really great. Our fee business is strong. Our development pipeline is the strongest in the industry. Big cities like New York and Chicago are in high demand. Our group business for the remainder of this year and through 2008 looks very good and the core time share business is performing very well.

(Excerpt from full HLT conference call transcript)

And things are so good for Coach (COH) they are turning away business.

Before we get into the financial highlights of the quarter, I want to briefly touch on the closure of our small corporate accounts business through which Coach sold products to distributors for corporate gift-giving and incentive programs. As noted in the press release, we have decided to cease operations of this business in order to better control where our product is ultimately sold. Simply put, our goal is to curtail diversion of our product into non-image-enhancing environments such as the warehouse retailers and the discount chains.

Now, I would like to discuss the outstanding results of our continuing business. We just announced a sales increase of 30%, and a 50% increase in earnings per share for the quarter just completed on a continuing basis. It’s worth noting that this was the 21st consecutive quarter that Coach achieved sales growth of at least 20%.

(Excerpt from full COH conference call transcript)

So there you have it. By a 4-1 margin it is very hard to see signs that the consumer has slowed down. At least not yet.

Disclosure: Author is long Starbucks (SBUX) at time of publication.

Large Cap Watch List (Track at Marketocracy) member Coach (COH) shares traded down sharply after the company Reported Third Quarter Earnings:

Coach, Inc., a leading marketer of modern classic American accessories, today announced an increase of 50% in earnings per diluted share on a continuing operations basis to $0.39 for its third fiscal quarter ended March 31, 2007, up from $0.26 per diluted share a year ago on the same basis. During the quarter, the Company ceased operations of its Corporate Accounts business in order to better control the location and image of the brand where Coach product is sold. Including the contribution of these discontinued operations, earnings per share rose 42% to $0.40 as compared to $0.28 reported a year ago, ahead of analysts’ expectations of $0.38.

Investors were disappointed in guidance that was lower due to discontinuing the Corporate Accounts business. According to the company:

The company now estimates fiscal 2007 sales from continuing operations of at least $2.6 billion for the full fiscal year ending June 30, 2007, an increase of 28% from the $2.035 billion in the prior year, and earnings per share of $1.67, or up 40% from last year’s $1.19 on the same basis. This compares with the analysts’ current consensus of $1.72, which Coach estimates included a $0.10 contribution from discontinued operations, resulting in an adjusted consensus estimate of $1.62 on a continuing operations basis for FY07. The company’s guidance for the fiscal year reflects sales of $640 million and earnings per share of $0.40 for the fourth quarter, up 36% from the $0.29 reported for the fourth quarter in fiscal 2006.

For fiscal 2008, on a continuing operations basis, Coach projects sales growth of about 20% to at least $3.1 billion and earnings per share growth of at least 21% to at least $2.02. This compares with the analysts’ consensus of $2.09, which Coach estimates included an $0.11 contribution from discontinued operations, resulting in an adjusted consensus estimate of $1.98 on a continuing operations basis for FY08.

A six percent decline in the share price given a 3.5% decline in projected earnings might not seem an excessive overreaction. However, we think focusing on next year’s earnings may be a mistake.  When is the last time you heard of a company voluntarily giving up sales? It doesn’t happen often, and when it does it either signals that the company is in deep trouble or is in a position of strength. In this case, it clearly appears to be the latter.

With sales growing more than 20% annually at full price, why should the company discount its products and dilute its brand? The answer is that it shouldn’t – and management made a tough decision to reduce today’s earnings to protect the brand. With $1 billion in cash and virtually no debt there is little doubt of the company’s strength.
In short – we think investors selling Coach on this news probably made a mistake.

Money Smart Life » Carnival of Investing – Super Bowl Edition

The world of sports shares many common aspects with investing; such as analysis, strategy, performance, discipline, statistics, winners, and losers. Of course the financial stakes are often higher in investing than sports but there’s still a lot we can learn from watching teams and coaches prepare and play their game. What better place to look for examples than one of the premier sporting events in the world, the Super Bowl!

Be sure to check it out.

When it comes to running semiconductor companies, we’re nothing but armchair quarterbacks.  But sometimes armchair quarterbacks, with the benefit of a high-def TV and the ability to tune out the screaming fans, can see the game unfolding better than the coaches on the field.
STMicroelectronics 4Q Jumps 51 Percent: Financial News – Yahoo! Finance

Swiss chip maker STMicroelectronics NV said Tuesday its fourth-quarter profit surged 51 percent from last year, despite what the company characterized as a “more pronounced than forecasted” market correction.Net income for the quarter was $276 million, or 30 cents per share, up from $183 million, or 20 cents per share, last year. Revenue for the quarter was $2.48 billion, up 4 percent from $2.39 billion last year.

Analysts polled by Thomson Financial expected the company to post earnings, on average of 21 cents per share on $2.56 billion in revenue.

“Looking at the fourth quarter and near-term environment, the current market correction underway in some of the key applications we serve is more pronounced than forecasted,” said President and Chief Executive Officer Carlo Bozotti.

Sounds to us like Mr. Bozotti needs to look for better forecasts.

Disclosure: William Trent has a long position in SMH.