Maybe Coach Needs a Coach of Its Own

It seems lately the best way to afford a Coach bag is to stay away from Coach (NYSE: COH  ) and invest in its competitors such as Michael Kors Holdings  (NYSE: KORS  ) . While two years ago Michael Kors had a much cheaper market cap, its continuously impressing results have allowed its stock to soar while Coach shows signs of struggle.

Coach sliding at second base
On Jan. 22, Coach reported its second-quarter fiscal results. Revenue fell 6% to $1.4 billion. Net income fell 15.9% to $297 million or $1.06 per share. Analysts had been expecting an EPS decline to $1.11 but not this bad.

Chief executive Victor Luis didn't do much to try to sugarcoat it. He said the women's bag and accessories business in North America has continued to disappoint the company, though he did blame "substantially" lower traffic in general. The bright spot was in China where Coach saw a 25% surge in sales along with same-store sales growing by a double-digit percentage.

In North America alone, however, total sales were sliced 9% while same-store sales took a bad plunge of 13.6%. Luis' response to counter the North American bloodbath is "product, stores and marketing." In other words, it sounds like more of what the company has done for decades, only that's starting to be far less effective lately.

Conference call
During the conference call, Luis made mention of a "new competitive landscape." That may be where Michael Kors is starting to eat Coach's lunch. President Francine Della Badia pointed out that it was the steepest decline in holiday traffic in six years. Its factory malls, likewise, were lacking in the surge leading up to the two weeks before Christmas that the company was expecting. Even its Internet traffic was lacking, which is rare among retailers these days and seems to be a red flag no matter what the explanation.

All in all, a 13.6% dive in same-store sales is disturbing and tells this Fool that something is wrong and likely could get worse...possibly much worse. Coach guided for more declines for the rest of the fiscal year.

At the beginning of the question and answer period, Luis seemed kind of defensive about the competition. He insisted that Coach has the best team in luxury specialty retail and pointed out the company is the "original U.S. luxury brand," the "most authentic brand," and the "most loved brand." Luis continued, "Of course, the environment around this has shifted. Consumer shopping behaviors are changing, there's a new competitive environment." It sounds like there's a newer kid on the block that is threatening to take more of that "love," and that kid is named Michael Kors.

Michael Kors
Michael Kors is scheduled to report its fiscal third-quarter results on Feb. 4. Analysts expect the handbag competitor to show sales leap 35.2% to $860.9 million and earnings per share to jump 34% to $0.86. Coach may still be the more loved brand, but Michael Kors is the more loved stock due to the more loved growth expectations.

Last quarter, same-store sales exploded 23%. It was the 30th quarter in a row of same-store sales gains. North America likewise saw same-store sales explode by 21%. With its upcoming report, the company guided for same-store sales to increase 15% to 20%. Is Michael Kors starting to become the next Coach?

Foolish final thoughts
In my own personal observation, I'm seeing Michael Kors handbags as the slightly cheaper, similar looking, yet more modern and more hip version of Coach. Based on that, Coach may be in trouble. But more important than this Fool's observation and opinions is the numbers. While Coach is still doing pretty well, new international markets are saving the day, while the fashion trend, judging by the numbers, shows a fast deterioration in the popularity of the brand.

Meanwhile, Michael Kors is on a tear. Fools may want to consider ditching Coach and looking into Michael. Coincidentally, they both have similar analyst earnings- per-share estimates, but with Michael Kors you get exploding sales and profits that always seem to beat expectations; with Coach you get hope and excuses with business declines. Michael Kors seems worth the premium paid. 

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