Since Michael Kors' (CPRI -0.24%) debut on the stock market, Coach's (TPR 0.30%) shares have fallen 16% in value. The S&P 500 has gained about 50% over the same time frame, and Kors has risen 220%. Today's earnings announcement isn't going to reverse that course, with Coach failing to meet the expectations of the market, sending shares down 7% ahead of the bell.
Sales of handbags in North America continued to drag the business down, and all the growth in accessories and menswear couldn't make up for a weak core. Overall sales fell for the quarter, compared to 2012, as did income per share. Analysts had hoped for $1.11 but Coach only managed $1.06. After a run of weak quarters, the truth of the matter is undeniable: Coach is on the ropes.
Losing the battle and the war
It's one thing not to have the hottest product out at a given time -- sometimes the iPhone is it, sometimes an Android phone steps up. It's another thing to just be beaten. Kors has consistently grown its sales and market share while Coach has just fallen. For the six months through December, Coach's revenue fell 3.6%. Kors hasn't reported its third quarter yet, but for the six months through September, revenue had grown 45.7%.
Coach is the thing that was hot, but now we've got Kors, Kate Spade, and Tory Burch. Coach saw this coming, which was likely why it moved into men's and more accessory sales, but those businesses aren't its core product. Women's handbags are what brands are competing to sell; any other products they can move are just icing on the cake.
All signs point to "no" at Coach
While it's too broad to say, "In fashion it's all down to the strength of the brand," in fashion it's almost all down to the strength of the brand. And Coach is weak. The combination of comparable-store sales growth and gross margin can tell you a lot about a brand's strength. Comparable-store sales tell us how well a business is doing at growing, even if it's not adding new locations. Anyone can sell more lemonade by opening more lemonade stands.
Operating margin lets us know if sales are growing because the brand is strong or because the stores are constantly plastered with "50% OFF THIS WEEKEND ONLY" signs. A strong brand is in demand and doesn't have to sell cheaper to sell more.
Coach's comparable sales in North America fell 13.6% last quarter, and its gross margin dropped 3 percentage points. The company is selling less for less money. Kors, again on the other hand, is selling more for more money. Comparable sales grew 22.9% in its last reported quarter, and gross margin grew 1.5 percentage points to 60.8%.
In short, Coach is a sitting duck. The company still has a lot of name recognition and a strong product line, but Michael Kors is currently eating its lunch. If you're on the lookout for growth and the next hot thing, give Coach a pass.