This Fashion Luxury Handbag Maker Is a Sweet Pick for Investors

Coach (NYSE: COH  ) has been underperforming its rival Michael Kors (NYSE: KORS  ) on the stock market. Since the beginning of the year, Coach has nearly stayed flat, while Michael Kors has experienced a 57.90% rise. Although Coach underperformed Michael Kors, it has outperformed Vera Bradley (NASDAQ: VRA  ) . What investors might like about Coach is its super-high return on invested capital at 46.70% and strong debt-free balance sheet. Moreover, many investors believe that Coach's turnaround will deliver sweet gains. Let's take deeper to determine whether or not Coach is a good buy right now.

Michael Kors is hard to beat
Previously, Coach enjoyed double-digit growth and increasing earnings per share. Due to severe competition from its peers and challenging environment, however, Coach has experienced declining operating performance. In the first quarter of fiscal 2014, its net sales decreased by 1% to $1.15 billion, while its operating income came in at $322 million; this was 3% lower than its operating income of $332 million last year. Compared to the same period last year, its diluted EPS stayed flat at $0.77 and was supported by the share buyback activity during the past twelve months. 

In contrast, Michael Kors delivered spectacular growth in both top line and bottom line in its second quarter of fiscal 2014. Its revenue rose by 38.9% to $740.3 million, while its comparable-store sales jumped by 22.9%. This quarter represented the 30th consecutive quarter of growth for the company. 

In North America, Coach sales slumped, with a decline of 6.8% in comparable store sales. The disappointing first quarter North American results were due to slow sales of women's handbags and accessories. In the same region, Michael Kors demonstrated a totally different picture with the sales growth of 31% and comparable-store sales of 21%. Michael Kors' superb North American performance was driven by strong consumer response to its jet-set in-store experience and its accessories and watch offerings.

It's not a surprise that Vera Bradley experienced depressed share price performance year-to-date, as it has also experienced sluggish operating performance. In the third quarter, its comparable-store sales declined by 6.5% with lower traffic levels driven by soft mall traffic and overall below-expectations product assortments. For the full year, the company expected a comparable-store sales decrease in the mid-to-high single digits, while its indirect revenue declined in the mid-teens. 

The international segment will drive Coach forward
What might drive Coach forward is its international segment, accounting for around a third of Coach's total revenue. In the first quarter, international sales increased by 9% on a constant currency basis; this was strongly supported by China business. Coach's China sales enjoyed double-digit growth at 35% due to distribution and double-digit same-store sales. In the full year 2014, Coach targeted to grow its square footage by about 25% to 30 net dual-gender stores. It is expecting total sales of around $530 million in China. 

In terms of valuation, Vera Bradley and Coach have a similar EBITDA (earnings before interest, taxes, depreciation and amortization) multiple of around 8.2. Michael Kors, in contrast, has a quite high EBITDA multiple at nearly 18.7. The market indeed seems quite optimistic about the outstanding double-digit growth of Michael Kors in every market.

My Foolish take
Michael Kors looks exciting to own because of its spectacular growth. However, it is quite vulnerable with a high valuation. If Michael Kors' business growth slowed down, its share price will contract materially. Coach seems to be a better buy with a much lower valuation and the potential to grow its business in emerging markets. Moreover, investors also get 2.50% dividend yield at the current price. Investors might also feel more confident about investing in Coach as a result of the recent $1 million insider buy from Coach's CEO and Chairman Lew Frankfort. 

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