Investors Who Missed the Michael Kors Move Have A Second Chance

Although the hottest name in the accessory market is Michael Kors, there's another company looking to capture more of the handbag market share.

Apr 21, 2014 at 10:33AM

After the success that shares of Michael Kors Holdings (NYSE:KORS) have seen over the last couple of years, with the stock up more than 270% since its 2011 IPO, Kate Spade (NYSE:KATE) is looking to follow in its footsteps by narrowing its focus on the high-end handbag market.

However, Kate Spade is doing more than just attacking the handbag market--it's also setting its sights on the entire accessory industry. This will include competing with the likes of Ralph Lauren (NYSE:RL). A few of the other areas that Kate Spade is focusing on are watches, jewelry, and sunglasses.

Meet the new Kate Spade
Kate Spade recently went through its second name change in less than two years. First, it went from Liz Claiborne to Fifth & Pacific. Recently it changed its name to Kate Spade. This comes as the company is narrowing its focus to accessories.

Kate Spade already has a solid brand with Kate Spade. Toward the end of last year, Kate sold off Juicy Couture and Lucky Brand Jeans. The proceeds from its Juicy Couture and Lucky Brand Jeans deals should help with the transition while also helping the company pay down debt. Kate Spade has more debt (as a percentage of total assets), around $400 million, than either Ralph Lauren or Michael Kors.

One of the big benefits of its transition to an accessory company is that margins should expand. Last year, Kate's operating margin came in at a negative 3.7%. Meanwhile, Kors' was a whopping 30%. 

International and brand innovation hold the greatest growth potential
The focus going forward will be on positioning Kate Spade in the global market. Kate Spade generates three-quarters of its revenues from the U.S. Thus, there's an opportunity for the company to expand abroad. It has yet to license its brand to third parties in Asia, but the company plans on growing its international sales (as a percent of total revenue) to two-thirds over the next few years, and it'll do this with a focus on Asia. The company will be opening up to 60 stores internationally this year as it goes after the growing markets of China and Japan. 

The other key market for Kate Spade is the men's segment. Although the high-end accessory market for men is still much smaller than for women, it's been growing at a much faster rate. This is the reason Kate Spade is looking to increase the visibility of its Jack Spade brand. Along the lines of innovation, Kate Spade recently launched its Kate Spade Saturday brand. These items include ready-to-wear accessories and items for the home. Just another step that's helping the company compete with Ralph Lauren.

One opportunity that Kate Spade has is to grow its presence via store-in-a-stores. This is an easy way to expand at a low cost. Although Kate Spade hasn't laid out any plans for store-in-a-stores, this is a strategy that Michael Kors has adopted. As of the end of the last quarter, Michael Kors had more than 1,400 store-in-a-store locations.

How the competitors stack up
While shares of Kate Spade aren't quite as cheap as Ralph Lauren, they still offer a better value than Michael Kors. Kate Spade trades with a 3.2 P/S ratio, while Michael Kors' is 6. It's worth noting that Ralph Lauren's P/S is only 2, and one of the key advantages for Ralph Lauren is that it offers investors a dividend. Ralph Lauren has a 1.2% dividend yield, while Michael Kors and Kate Spade don't pay dividends.

However, analysts are expecting Kate Spade to grow earnings at a higher rate than Ralph Lauren. Wall Street expects Kate Spade to grow earnings at an annualized 10% over the next five years, compared to Ralph Lauren's 8% expected growth rate.

Bottom line
Kate Spade isn't a turnaround story; rather it's a company in transition. It already has a well-known brand, and it's now deciding to focus on the accessory market. For investors who might have missed the move in Michael Kors' stock but are still looking to gain exposure to the fast growing high-end accessory market, they should take a look at Kate Spade.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Michael Kors Holdings. The Motley Fool owns shares of Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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