Investors Are Bragging About Owning Coach Even Less Than Customers Are

Leading fashion designer in luxury handbags and accessories Coach  (NYSE: COH  ) announced dismal third-quarter results for fiscal 2014. For more than fifty years, Coach's high-end leather goods have been desired by consumers who want the world to know that they possess Coach purses. Unfortunately for Coach, fierce competition from American fashion designer Michael Kors Holdings Ltd. (NYSE: KORS  ) has greatly affected women's handbag and accessory sales in the company's North American division.

Along with a number of other factors, Coach's earnings for the third quarter were quite a disappointment as the stock fell nearly 9% in the first few hours of trading on Tuesday, April 29, 2014. Coach has, apparently, fallen off its pedestal in the eyes of consumers.

Anything but fashionable
Coach's fiscal third-quarter earnings were far from ideal. In fact, the only highlights of the company's third quarter were increased sales in its markets abroad and a successful appearance at New York's Fashion week, which took place in February. In Coach's fiscal third-quarter ended March 29, 2014, the company's total revenue fell 7% from $1.19 billion to $1.10 billion.

CEO Victor Luis of Coach acknowledged that Coach's revenue slipped because disruptive weather conditions affected consumer traffic to its stores and the Easter holiday fell on a later date than usual. He went on to add that e-commerce sales did not measure up to previous quarters due to the company's decisions "to eliminate third party events, as well as limit the access and invitations to our factory flash site." 

Coach's net income also declined in the third quarter to $0.68 a share, or $191 million, while in the year-ago period Coach's earnings per share totaled $0.84, or $239 million. On another note, Coach did repurchase and retire 3.6 million shares in the third quarter at an average price of $47.99, dishing out about $175 million with the hope of increasing the company's stock value for its shareholders.

North American sales were actually the real problem for the company. Fortunately, sales in the company's Asian and European markets grew sharply as consumers abroad took favorably to Coach's classic designs and hand-crafted leather-goods collection. What's most disconcerting is that Coach's North American sales dropped 18% to $648 million, as its sales had totaled $722 million in the third quarter of fiscal 2013.

The worst part was that Coach's comparable-store sales fell 21% on account of low sales volume in women's handbags and accessories despite strong growth in men's and footwear. As for China, Coach's sales jumped over 25% there with sales in Japan climbing upwards of 10%. Overall, Coach's international sales increased 14%. Clearly Coach is losing the war in North America, while those losses are being made up by international customers.

Losing its grip
Some would call Coach's third quarter a "challenging" one in comparison with previous quarters. Unfortunately, Coach will continue to face its share of challenges, especially in North America, as consumers discover new up-and-coming luxury brands that are doing a better job than Coach at satisfying consumer demands in the fashion industry. Let's be honest, Michael Kors is growing much faster than Coach despite being a smaller company. To see for yourself, take a look at Michael Kors' revenue growth over the past three years in comparison with that of Coach.

Company Name

FY 2011 Revenue

2011
YoY Growth

FY 2012
Revenue 

2012
YoY Growth

FY 2013
Revenue 

2013
YoY Growth

Michael Kors

$1.3 Billion

61.9%

$2.18 B

67.7%

$3.21 B (Est.)

47.1% (Est.)

Coach

$4.16 Billion

15.2%

$4.76 B

14.4%

$5.08 B

6.72%

To say that Michael Kors is doing well for itself would be a true understatement. Michael Kors is not only expanding quickly, it is becoming increasingly favored by consumers who find the brand's styles refreshing and trendy. The same cannot be said for Coach, whose American audience has become bored with the brand's designs and thus has become captivated with those of Michael Kors.

As you can see from its revenue growth, Michael Kors is on a roll, and it will likely take the leader's spot from Coach within the coming years as more and more consumers trade up for Michael Kors' purses. Furthermore, it is likely that Michael Kors will continue to produce double-digit growth in net sales over the next few years whereas Coach's sales will likely remain in the single-digits.

Foolish takeaway
Foolish investors should take note of how fast Michael Kors is growing in comparison with Coach and do further research into the brands' latest strategic developments. To generate sales in North America, Coach will have to drum up a new collection of designs in order to draw consumers back to the brand. Clearly consumers, especially women, are finding Coach's handbag and accessory collection outdated and uninteresting despite its high-end status.

While international sales are looking up for Coach, it will not be long before Michael Kors begins to steal this traffic as well since it already has made progress abroad. Investors would be wise to hold off on investing in Coach until North America sales in women's turn around. Until that happens, sales growth in Coach's Asian and European markets will do nothing more than replace its losses in North America.

The biggest thing to come out of Silicon Valley in years
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2951980, ~/Articles/ArticleHandler.aspx, 12/20/2014 2:25:06 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement