Michael Kors Still Rules the Luxury Goods Space, But Coach Has Its Virtues Too

The fierce rivalry between luxury goods makers Michael Kors (NYSE: KORS  ) and Coach (NYSE: COH  ) , and to a lesser extent Fossil Group (NASDAQ: FOSL  ) and Jones Group (NYSE: JNY  ) , always seems to fuel debate among investors about which stock provides more bang for an investor's buck. It's not particularly hard to single out Michael Kors and Coach as the true leaders of the space, but choosing between the two can be a daunting challenge for investors trying to build a diversified portfolio. Both stocks are good investments with their fair share of strengths and weaknesses.

Michael Kors is a high-flying momentum stock with considerable potential for big gains, but at elevated risk. The Hong-Kong based company made its debut on the market in 2011 with $1.3 billion in revenue and slightly less than $150 million in profit. Investors who opened positions in the stock back then have been handsomely rewarded, with their investments more than tripling since the stock started trading.

The risk profile for Kors remains significantly steeper than that of its rival mainly because of the unusually high expectations for revenue and income growth from its investors. Zacks Investment Research expects the company to deliver an astounding 43.81% growth in earnings in fiscal year 2014, and an average of 25.38% over the next five years.

In sharp contrast, Coach is expected to post much less impressive earnings growth: (-6.89%) in fiscal year 2014, and 11.58% average growth over the next five years.

Kors is expected to grow its revenue 39% this year (up to March 2014) to $3.4 billion, and 25% in the next fiscal year. This implies great faith in the fashion retailer, and the ability of the Kors brand to continue wowing consumers season after season. Kor has already reported stellar same-store sales this year, propelled by its trend-setting shoes and accessories. Investors are banking on the brand's popularity to continue showing a clean pair of heels to its competition in the years to come.

Kors' Achilles' heel
Kors' share price and valuation reflect the heightened expectations for growth. Its P/E ratio and price-to-earnings ratio are well above those of its peers. Such an elevated valuation makes the shares vulnerable to steep declines, especially if the broader market takes a downturn.

Kors' less illustrious peer, Coach, is expected to show flat revenue this year and a modest 6.5% growth compared to last year. However, investors should not forget that Coach is an established 75-year old player in the space with twice the revenue of Kors. It's usually best to purchase stocks of mature companies when they are not on the run, such as the one Kors is currently experiencing.

Despite its less-than-glowing future growth profile, several hedge fund managers still consider Coach a decent value investment and they have been upping their ante in the stock for the last two quarters. Robert Olstein of Olstein Value, John Rogers of Ariel Appreciation, and Stephen Mandel of Lone Pine Capital all think the shares are a good investment, based on the firm's considerable success in adding new and innovative product lines such as a new men's line and men's shoes to its huge worldwide cache.

As a value investment, Coach offers several safety valves that a growth stock such as Kors would be hard-pressed to offer. Coach has a stellar track record of rewarding its investors -- the stock is up more than 200% in the last five years, despite a sluggish performance this year. Its dividend yields 2.4%, while Kors does not offer any dividends yet.

The little guys might have something to offer, too
Few investors rate Jones Group or Fossil Group as highly as either Michael Kors or Coach when thinking of investing in the luxury goods sector. However, these two are not complete write-offs, and they do have some strong points that can help their cases.

Jones Group is not a classic growth or dividend champion. The company's earnings are expected to fall by close to 40% this year. Earnings growth over the next five is expected to be a modest 10%. Revenue fell 1.4% this year compared to 2012, with the firm's important domestic wholesale sportswear suffering a jaw-dropping 10.4% revenue decline. You would therefore be forgiven for wondering what all the hoopla and buzz about the company is all about.

Investors at the moment are primarily interested in the company's planned buyout. Sycamore Partners is expected to buy the luxury-goods maker in 2014. The company was earlier expected to be sold at approximately $16 per share. At the current price of $14.65, that would represent a 9.2% premium. However, the latest news indicates that Sycamore will pay only $1.2 billion for Jones, or $15 per share. The share price has been rising, and the expected premium could be more than wiped out if the trend continues.

The Fossil Group sells mid-end to high-end merchandise, including well-known brands such as Burberry, Diesel, DKNY, Michael Kors, Emporio Armani, and Skagen. Fossil earns about a third of its revenue from licensing rights to other companies that make watches using its famous Emporio Armani, Burberry and DKNY brands.

The company has been expanding its presence in Europe and Asia, and managed to grow its revenue in China by 50% in the last quarter alone. A major point of concern for the company, however, is the headwinds it faces in the American market, where it derives half of its revenue. The American market is not hot on lower-end consumer goods, which is bad news for Fossil since it has a mix of both higher-end and lower-end merchandise.

The company's high-end goods segment, however, has been helping to offset the weaknesses in the lower-end segment, and it also helped to make the company profitable with a gross margin exceeding 57%. The company is expected to grow its earnings by 17.59% this year and 15.47% over the next five years. I would therefore recommend it as a better investment than Jones Group.

Bottom line
To build a well-balanced portfolio, you need both value stocks and growth stocks. Michael Kors is an excellent growth stock, while Coach is a good value stock. Both stocks are good investments, and the question of which one you should choose for your portfolio depends on the particular niche you want to fill.

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