Coach, Kors, Spade: Great Purses, Bad Stocks

Premium handbags are hot, but Michael Kors, Coach, and Kate Spade are slumping.

Aug 17, 2014 at 9:05AM

It may be a great time to buy a new luxury handbag, but you may want to think twice about buying into a luxury handbag maker. It's been a rough earnings season for the purse pushers. Folks are still buying luxury totes, satchels, and shoulder bags. Investors are simply concerned about where the industry is heading later this year.

Looking back, the growth is certainly there. The market just isn't impressed. Kate Spade (NYSE:KATE) reported results on Tuesday morning. It experienced a 49% surge in sales, reversing a year-ago deficit with a small profit on an adjusted basis. The stock took a 25% hit on the news.

Michael Kors (NYSE:KORS) reported last week. It was another period of robust growth with sales and earnings up 43% and 50%, respectively. Wall Street shook its head, sending the shares 6% lower. The only premium handbag maker that saw its stock rise after posting fresh financials was Coach (NYSE:COH), but it's hard to get excited when sales and adjusted earnings are falling 7% and 35%, respectively.

Why did the market turn on the leaders and warm up to the laggard? Coach's rise came largely on the iconic brand giving investors a chance to exhale after several horrendous quarters. As bad as it was seeing revenue clock in lower again -- including a brutal 16% slide in North America -- Coach's numbers actually beat Wall Street targets on both ends of the income statement. Coach was also able to paint a slightly less bleak picture of its future with strong gains in China and the potential of a brand revival with the addition late last year of a new creative director. 

Coach investors may be feeling as if the worst is behind them, but that may not be the case given the reason why the market soured on Kors and Kate Spade this month. Both companies disappointed on margin concerns, triggering fears that recent price markdowns may stick around for some time .  Gross margins slipped at Kate Spade, and Kors is bracing investors for contraction in the current quarter.

When the two companies that are actually growing in this niche are discounting their products, it's the whiff of a price war where shoppers win and investors lose. If you've been fancying a trendy handbag with a Coach, MK, or Kate Spade label you may get a better deal than you think. Summer discounting is a seasonal thing as the companies make room for new lines, but this year it's apparently more ambitious than usual. 

Bulls will argue that discounting will help broaden the mainstream appeal of designer handbags, but investors are naturally more concerned about the bottom line. Kate Spade is marginally profitable and shares of Kors have been riding high on its explosive earnings growth. 

Given the margin uncertainty, it's easy to see why the market sheepishly returned to Coach, which still generates slightly more revenue than Kors and a lot more than Kate Spade. A lot of the bad news was already discounted there, and it offers patient investors the luxury of a dividend with its generous 3.9% yield.

With the economy still showing signs of life, it was easy to see why investors flocked to luxury brands that stand to benefit from a more affluent marketplace. However, if contracting margins are the first shot in a drawn out price war it's easy to see why many investors are ducking for cover until a cease-fire is declared.

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Rick Munarriz has no position in any stocks mentioned. 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.

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