Michael Kors (NYSE:CPRI) and Coach (NYSE:TPR) are arguably the two most popular luxury goods manufacturers in the world, especially when it comes to handbags and watches. These industry giants have been in a constant battle for market share over the last several years and the competition is heating up as the world demands more and more luxury products. Both companies have just reported their quarterly results, so let's take a look and decide which one had the better quarter and where we should invest our money today.
The luxury retailers
Michael Kors is home to one of the most fashionable lines of women's and men's handbags, apparel, and accessories. The most consumer attention has been placed on its watches and handbags, but it has been gaining ground in clothing, footwear, sunglasses, and other categories. There are not many brands that cater to the taste of both women and men, but Michael Kors has found the recipe for success.
Coach is a global leader in the manufacturing and retail of premium handbags and accessories. The company sells its products through its own stores, specialty stores, and select department stores such as Macy's and Dillard's. It also operates e-commerce websites in the United States, Canada, Japan, and China.
The third-quarter report was released on Feb. 4 and it far exceeded analyst expectations. Here's an overview of the results with a year-over-year comparison:
|Earnings per share||$1.11||$0.86|
|Revenue||$1.01 billion||$859.94 million|
- Earnings per share increased 73.4%
- Revenue rose 59%
- Global comparable-store sales grew 27.8%
- North American comparable-store sales rose 24%
- Gross profit increased 61.6% to $619.5 million
- Gross margin expanded 100 basis points to 61.2%
- Other most notable statistic: 533 Michael Kors stores operate today compared to just 368 at the conclusion of the third quarter last year.
Second-quarter earnings were released on Jan. 22 and the results missed on both lines. Here's a breakdown of the report and a year-over-year comparison:
|Earnings per share||$1.06||$1.11|
|Revenue||$1.42 billion||$1.48 billion|
- Earnings per share decreased 13.8%
- Revenue fell 5.3%
- North American comparable-store sales declined 13.6%
- Gross profit declined 9.4% to $982.7 million
- Gross margin decreased 300 basis points to 69.2%
- Other most notable statistic: international sales increased 2% to $425 million as sales in China rose about 25%. This puts the company on-track to reach its goal of $530 million in international sales.
The companies' largest market
North America makes up the majority of sales for both Michael Kors and Coach, so let's see how each are performing here:
The North American region was a shining star for Michael Kors in the third quarter. Total sales increased 50.5% to $862.62 million, driven by the holiday shopping season and a strong 24% increase in comparable-store sales. The most consumer demand was seen in its watches and accessories segments, but handbags also saw a sharp rise in sales. In summary, Michael Kors has become one of the quickest-growing brands in North America and it is only heating up.
North America was an absolute nightmare for Coach in the second quarter. Total sales declined 9% to $983 million, as direct sales fell 8% and shipments to department stores were weaker than expected. Worst of all, comparable-store sales declined 13.6% as women turned a blind eye to its product offerings. Regardless of its success abroad, North America makes up nearly 70% of total sales for the company, so Coach needs to do everything possible to get this region back on track.
Expectations going forward
In the report, Michael Kors also updated its guidance for the fourth quarter. The company expects earnings per share to be in the range of $0.63-$0.65 on revenue of $790 million-$800 million; this would also project comparable-store sales to grow 15%-20%. These numbers would result in earnings per share increasing by 26%-30% and revenue rising by 32.3%-34% year-over-year. After what we just saw in the third quarter, I am fully confident that Michael Kors will meet or exceed these expectations.
In its report, Coach did not give its outlook on the upcoming third quarter, so we will look to the consensus analyst estimates; these call for earnings per share of $0.62 on revenue of about $1.1 billion. The aforementioned estimates would represent declines of 26.2% in earnings per share and 8.3% in revenue from the same quarter a year ago. Another negative quarter will not help Coach's stock price and would leave investors even less impressed with the company. In my opinion, Coach's stock should not be touched, regardless of how "inexpensive" it becomes.
And the winner is...
After reviewing the quarterly reports, segment performance, and outlook for the next quarters, the clear-cut champion in this matchup is Michael Kors. It reported an absolute blowout quarter and it is quickly taking market share from its competitors, like Coach. As a result of the strong earnings report, Michael Kors' stock has spiked to fresh all-time highs, so investors should wait for it to come down a bit before initiating a new position. Coach, on the other hand, is untouchable in today's market because the negatives far outweigh any positives you may find for the company.