The Consumer Discretionary sector continues to fly high as one of the lead performers in the current rally.  For the last three months, the sector SPDR has gained just over 9%, and is up almost 24% for the last 12 months.  Gains haven't just come at the low end of the scale, but have been enjoyed by luxury brands too.  However, this may be about to change as recent holiday sales disappointed some of the top tier brands, and this will likely filter down through the retail market.

The most recent hit to the sector was delivered by Coach, Inc. (NYSE:COH).  The stock dropped 16% on a combination of bad earnings, and a strategy switch to selling shoes.   The company was "clearly disappointed in our North American performance notably in women's where results were below expectations."  Lew Frankfort, CEO, blamed the fiscal cliff and a slow recovery from Hurricane Sandy as factors for the drop, but they were also forced into "heightened promotional activity" (but not price drops) in their core business of women's bags and accessories, effectively 70% of their business.  The underperformance was not the result of natural disaster or politics, but was instead the result of market share losses to Michael Kors Holdings Ltd (NYSE:KORS) amongst others.

Digging a little deeper,  weakness was not the fault of sales of high price items, such as $400+ leather handbags (which remained strong), but instead came from the lower end mixed material and logo products.  Michael Tucci, President of Coach North America Group did suggest a macro shift towards leather goods and away from the traditional logo business, but this in itself doesn't explain the strong performance from its competitors.  For example,   Coach's same store sales fell 2%, while Michael Kors rose 30%; Coach EPS was up 5%, Michael Kors did 96% year-on-year; Coach net sales rose 4% , Kors retail sales grew 82%.  Coach's reaction to launch into footwear has a 'two wrongs don't make a right' ring to it.  Not only is it a venture for which Coach has no history, but it also places itself deeper in competition with the very same companies stealing market share from it.

However, it wasn't all bad news for Coach.  Internet sales "remained strong", but actual figures were lacking.  International sales were robust, up 12% for Q2 and accounted for one third of total sales.  Chinese growth was up 40% from the prior year, with 13 new stores coming on line over the quarter.  Men's sales jumped over 50% for the year, to $600 million, providing an alternative avenue which the company can work.