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.
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.
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.
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Brian Nichols owns shares of Michael Kors Holdings. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool 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.