Michael Kors Still Crushing Coach With Teens

One of the primary reasons Tapestry (TPR 0.30%) purchased handbag maker Kate Spade last year was to help reach out to younger customers. Where CEO Victor Luis says its Coach products are about "function, quality, and leather," the $2.4 billion deal was seen as a way to woo millennial consumers with Kate Spade designs that offer "emotional attributes (that) hit at the high end when it comes to fashion, fun, and femininity."

That could narrow the point of differentiation between Tapestry and its rival Michael Kors (CPRI 1.85%), which has long been hugely popular with both millennials and Gen Z consumers.

Image source: Getty Images.

The path to luxury

Where Coach opted to pursue ambitions of becoming a luxury lifestyle brand, Michael Kors has positioned itself between the upper end and fast fashion, allowing it to reach across numerous price points, which has given it a decided edge in appealing to younger consumers. Analysts at Cowen & Co. say both millennials and Gen Z-ers not only favor rapid changes in styles and follow trend influencers more closely, but they also place a heavy emphasis on price and value.

Even so, both Tapestry and Kors have suffered from tepid sales over the past few years. Here's a side-by-side comparison of Kors and Tapestry's North American sales over the past three years.

Data source: Company annual SEC filings.

Both continue to struggle this year, too. In the most recent quarter, Michael Kors said on a constant currency basis that comparable-store sales dropped 5.2% from the year-ago figure, and it expects to see them fall by mid-single-digit percentage rates for the full 2018 year.

Although Tapestry enjoyed a 3% rise in global comps for Coach, comps for Kate Spade tumbled 7%, and while that might seem to bode ill for Tapestry's attempt at connecting with younger consumers, it's actually a result of the retailer trying to elevate the brand's image.

Much like Coach cut back on promotions and limiting distribution at department stores and outlets, Kate Spade is undergoing a similar process after having been overly reliant on discounting. The decline was part of Tapestry strategically pulling back on wholesale and online flash sales, which should eventually boost profitability, but it may also allow Michael Kors to put more distance between itself and Tapestry with millennial and Gen Z consumers.

Follow the money

Michael Kors, Kate Spade, and Coach were ranked as the top three handbag brands in Piper Jaffray's spring edition of its biennial "Taking Stock with Teens" survey, a look at where Gen Z shoppers are spending their money. However, Michael Kors was far and away the category leader with a 28% share, followed by Kate Spade at 17% and Coach at 14%.

While the standings were unchanged from the fall survey, Kors actually dropped by three percentage points in mindshare with the teens, whose average age was 16, while Kate Spade gained one. Although Coach's share was unchanged, it needs to watch out for Gucci, which suddenly appeared on the list in fourth place with a 9% share.

A report by Bain & Co. last October found that millennials and Gen Z shoppers will account for a third of all luxury spending in 2017 -- Forbes says that by 2025, they will make up 45% of the luxury market -- and that Gucci was gaining considerable traction with them. Through the first three quarters of the year, shoppers under the age of 35 accounted for 55% of its sales.

It's clear that together, Kate Spade and Coach can pose a strong challenge for Michael Kors for the attention of teens looking for affordable luxury, but the latter remains a dominant presence on its own. Yet it needs to be mindful not to become complacent, because Coach is ardently pursuing teens, launching a spring marketing campaign featuring Selena Gomez, who it hired last year as its brand ambassador to appeal directly to the millennial consumer.

Right now, Michael Kors owns that segment, but the sum of Tapestry's parts may make it the better bet to take that customer away.