Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Coach Versus Michael Kors: The Gap Widens!

Faye Landes, a retail analyst at Cowen Research, publishes a very telling report on handbag demand and trends called Handbag Wars. The report follows the likes of Michael Kors (NYSE: KORS  ) and Coach (NYSE: COH  )  as well as others like Vera Bradley (NASDAQ: VRA  ) , and in January it preceded a tough six-month stretch for Coach. Therefore, because she will release the next report soon, investors might want to take notice of the results, including what's already known.

The gap widens fast
In January 2014 Faye Landes showed that during the holiday season women across a variety of key consumer segments showed a rising preference for Michael Kors over Coach versus the prior year . In the key 18 to 34 year-old category, 61% of women preferred Michael Kors in December alone. Landes noted that the gap was widening fast between Coach and Kors, as 58% preferred the latter in the prior month.

If we look back to December of 2012 50% of respondents preferred each company. This shows that Coach is clearly losing steam with this key population. Moreover, in a subset within this population that purchases two to three bags per year, Michael Kors was listed as a top selection by 27% of those surveyed in December, up from 23% in November and 16% in the December 2012 period.

With that said, investors who follow Coach know what followed next: The company's same-store sales declined 13.6% in its holiday quarter followed by a decline of 21% in the succeeding quarter within Coach's North American operations . These declines were met with a rapid fall in operating margin, including a drop of 540 basis points in the company's most recent quarter.

Meanwhile, Kors has grown total revenue in excess of 50% in each of its last two quarters, including a 26.2% increase in comparable-store sales during its most recent quarter . Clearly Landes was right in implying that the gap between these two companies is rapidly widening.

What's next?
Last week Cowen Research tweeted a preview of Faye Landes' upcoming Handbag Wars survey that showed continued pressure on Coach. Given the pressure in recent months Coach investors should be worried about what this survey could predict for future quarters.

Earlier this month Coach hosted its Analyst and Investor Day presentation and warned that revenue could fall at a double-digit pace for the full year of 2015. Investors had been expecting sales to stabilize following strategic changes by the company as it brought on new creative leadership. However, stabilization doesn't seem to be the word of choice to describe Coach.

As a result, research firms like BAML are questioning its turnaround initiatives, lowering their price targets on Coach, and saying that the company cannot sustain an operating margin north of 30% in the immediate future . These problems could all put continued pressure on Coach, adding to its nearly 40% stock price loss for this year alone.

Coach is not alone!
Coach is the easy target due to its striking similarities to Michael Kors, but the latter's rise has affected other companies as well, such as Vera Bradley. Like Coach, Vera Bradley is a company that grew quickly in the years prior to 2013, but has found a sudden roadblock thanks to Michael Kors. As a result, Vera Bradley has also been forced into discounting initiatives, which is why its gross profit fell 230 basis points during its last quarter to 53.3 %.

In essence, Michael Kors is the first designer in years whose rise has caused peers to crumble around it. Even during Coach's fundamental glory days Vera Bradley was a competitor that also saw explosive growth. However, Michael Kors has become the go-to designer, one that's apparently gaining even more appeal with consumers.

Foolish thoughts
What makes Michael Kors so great is that it has managed to maintain margins and premium pricing in the face of major discounting among its high-end peers. While Landes' survey doesn't follow pricing, the increased preference toward Michael Kors is a good sign that its pricing power remains strong and that further discounting, and margin pressure, could be seen in peers like Coach and Vera Bradley.

Leaked: This coming consumer device can change everything
Imagine the multi-billion dollar sales potential behind a product that can revolutionize the way the world shops and interacts with its favorite brands every day. Now picture one small, under-the radar company at the epicenter of this revolution that makes this all possible. And its stock price has nearly an unlimited runway ahead for early, in-the-know investors. To be one of them and hop aboard this stock before it takes off, just click here.  

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

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: 3013410, ~/Articles/ArticleHandler.aspx, 8/28/2015 9:22:11 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...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated 12 hours ago Sponsored by:
DOW 16,654.77 369.26 0.00%
S&P 500 1,987.66 47.15 0.00%
NASD 4,812.71 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 4:02 PM
COH $30.10 Up +0.70 +0.00%
Coach CAPS Rating: ****
KORS $43.28 Up +2.21 +0.00%
Michael Kors Holdi… CAPS Rating: ****
VRA $10.21 Down +0.00 +0.00%