How Luxury Retailers Are Making a Comeback Today

Here are the three retailers that investors don't want to ignore.

May 21, 2014 at 2:40PM

With the arrival of spring, the warmer weather is driving more traffic to stores. Moreover, the economy continues to get stronger, with consumer spending in March rising at its fastest clip in almost five years, according to The Wall Street Journal. Indeed, this bodes well for retailers of all varieties, from big-box chains to department stores. However, certain luxury retailers are poised to make the biggest comeback this year thanks to a merchandising strategy known as affordable luxury.

Let's take a closer look at how high-end retailers, including Michael Kors (NYSE:KORS), Kate Spade (NYSE:KATE), and Coach (NYSE:COH), are growing sales through more affordable fashion lines and broader product categories.

A market leader
Michael Kors pioneered the affordable luxury segment with the 2004 launch of its more affordably priced MICHAEL fashion line. The company's "MICHAEL accessible luxury collection," as it is formally known, primarily focuses on accessories and handbags, though it also includes footwear and apparel. By fiscal 2012, as much as 90% of the company's total revenue came from sales of its MICHAEL brand.

Kors Spring Ad Campaign

Source: Michael Kors. 

Coach fits a similar mold, as the leather goods and accessories company floats just between the high- and middle-class offerings. True, Coach has stumbled lately at the hands of increased competition from Michael Kors -- the stock has fallen more than 26% in the past year. However, Coach is in the process of rebranding itself a "lifestyle brand," with a fresh product mix that includes more apparel and accessories.

In addition to offering a broader mix of lifestyle products, Coach is also betting on a new management team to reinvigorate its sales over the year ahead. Come June, Stuart Vevers is set to take over from Reed Krakoff as Coach's new creative director. The management shuffle was arranged nearly a year ago, so the transition should be a smooth one.

Nevertheless, Coach could face extra competition from Kate Spade's lower-end fashion line, dubbed Kate Spade Saturday. Kate Spade has really kicked it up a notch lately, with the luxury retailer generating revenue growth of 54% to $217 million in its latest quarter. With a flirty, fun assortment of reasonably priced merchandise like sundresses and satchels, Kate Spade's "Saturday" brand has grown from a single pop-up location in New York to more than six permanent stores in Japan and a handful now open throughout the U.S. Much of the appeal comes from the brand's competitive pricing. In fact, the retailer's Saturday collection is priced as much as 50% below its namesake Kate Spade New York brand. "This is a much more accessible line. That's why we see so much potential," said Kyle Andrew, senior VP of Kate Spade Saturday.

An "affordable luxury"-powered comeback
Ultimately, offering customers a more affordable product mix is a smart strategy for these retailers, particularly in overseas markets such as China, where the middle class is growing at a rampant rate. Looking ahead, the burgeoning middle class in emerging markets throughout the Latin America and Asia-Pacific regions should drive sales growth for retailers such as Kors, Coach, and Kate Spade, which continue to expand their respective affordable luxury offerings in these markets.

Of the three of these brands, I believe Kate Spade looks the most promising. Coach is still in the midst of reinventing itself as a lifestyle brand, whereas Michael Kors' growth story has already been playing out in the markets for some time now. Kate Spade, on the other hand, is just getting started. With 80 new store openings planned over the year ahead, Kate Spade could unlock much more growth in the coming quarters.

Nonetheless, all three of these retailers are making a comeback today thanks to the rise of affordable luxury in the retail space. 

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Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coach and 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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