Should You Ride Coach or Upgrade to Michael Kors?

Coach (NYSE: COH  ) hasn't impressed investors recently, which has had a lot to do with market share gains by Michael Kors (NYSE: KORS  ) . Coach is well aware of the increased competition, and it doesn't plan on sitting around and watching its market lead evaporate. Coach has some plans in the works, and a lot of the company's future success will depend on one man that you have likely never heard about.

Recent results
In the company's first quarter, sales declined 1% year over year. However, sales improved 2% on a constant-currency basis. Diluted earnings per share came in at $0.77, matching the year-ago quarter. Domestically, sales declined 1%, with direct sales dropping 1% and comps plummeting 6.8%. Internationally, China has been very strong, with sales jumping 35%. Japan has been a big drag, with sales dropping 22% due to a weakening yen. It basically comes down to market share losses in North America versus strength in China. (http://finance.yahoo.com/news/coach-reports-first-quarter-earnings-110000668.htmlMost importantly, while Coach has averaged 9% quarterly sales growth since late 2011, Michael Kors has averaged 50% quarterly sales growth. Michael Kors is invading Coach's space. Now Coach is betting big on a newcomer. 

Mystery man revealed
If you're a Coach investor, or a potential Coach investor, then you should know the name Stuart Vevers. Don't worry, you don't have to do any research. It has been done for you, and it will be presented in simplified fashion. 

Stuart Vevers was recently hired by Coach as Executive Creative Director. In other words, his work will determine the brand's future success. That's a lot of pressure, but Vevers has responded well to pressure in the past. Perhaps not in the beginning of his career, when he was hired by Calvin Klein in 1996. He favored pink and polka dots at the time, which was a no-go for Calvin Klein.

The good news is that Vevers bounced back, and in a big way. He later worked with Marc Jacobs at Louis Vuitton, he significantly improved Mulberry's brand image, he won the "Accessory Designer of the Year" award from the British Fashion Council, he served as Director of Loewe (Spanish fashion house) with great success, and he designed several "It" bags for the industry. Nobody knows what Vevers has up his sleeve for Coach. It has been reported that Coach executives state that he's constantly working. While this doesn't guarantee anything, it's a positive sign.

Recent performance comparisons
Despite all the negative publicity for Coach lately, it has grown its top and bottom lines over the past year. The problem is that while Coach and peer Ralph Lauren (NYSE: RL  ) have performed marginally well, Michael Kors has torn the cover off the ball.

Top line:

COH Revenue TTM Chart

COH Revenue TTM data by YCharts

Bottom line:

COH EPS Diluted TTM Chart

COH EPS Diluted TTM data by YCharts

It should come as no surprise that while Coach's stock is down 11.67% year to date, and Ralph Lauren's stock is up 10%, Michael Kors' stock has appreciated 52.01%. This is when you might think that Michael Kors is overvalued. You might be wondering whether Coach is undervalued. This leads us to company fundamentals:

 

Forward P/E

Net Margin

ROE

Dividend Yield

Debt-to-Equity Ratio

Coach

12

20.38%

47.00%

2.50%

0.00

Ralph Lauren

17

10.54%

20.41%

1.00%

0.07

Michael Kors

23

18.85%

52.29%

N/A

0.00

The best part about these three companies is that all of their management teams have proven exceptional at managing debt. All three companies have managed to grow their top lines without being leveraged. As far as overall fundamentals are concerned, all three are strong. Coach is trading at just 12 times forward earnings, making it appealing to bargain hunters. If you add the "Vevers Potential" factor combined with the 2.50% while you wait, then it looks even more appealing. Barring a complete broad market meltdown, Coach should be enticing here. 

On the other hand, until Vevers does something special, Michael Kors is the most exciting company of the group and it doesn't appear to be slowing down. The only negative is a lack of yield, but this does help keep the bottom line healthy. As far as Ralph Lauren goes, it's a solid company but it has been lagging its peers in most areas. Without any excitement, there's no reason for investors to choose it over a more attractive option. Piper Jaffray recently downgraded Ralph Lauren to Neutral from Overweight, citing a weakened apparel spending environment. 

The bottom line
Coach has been a strong company for decades, but it has never seen a threat like Michael Kors. If you choose to invest in Coach, you will be betting that Vevers can put Coach back in the driver's seat. If you would prefer not to gamble, and you would like to stick with the hottest company in the industry, consider Michael Kors. 

Motley Fool is a big believer in Coach, as well as two other companies
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