Coach (NYSE:TPR), the world-renowned manufacturer and retailer of handbags and accessories, has underperformed the market in 2014 and its weak earnings have played a key role in its decline. It has scheduled its third-quarter results for release in a few days and investors are left wondering if this is the quarter when things will finally get better. Let's take a look at Coach's most recent earnings report and the expectations for the upcoming release and also take a glance at its most popular competitor, Michael Kors (NYSE:CPRI), to determine if now is the time to buy the stock or if we should continue to avoid it.

Source: Coach

The saddening second quarter
On Jan. 22, Coach released its second-quarter report for fiscal 2014 and the results came in well below analysts' expectations; here's a breakdown and a year-over-year comparison:

Earnings Per Share $1.06 $1.11
Revenue $1.42 billion $1.48 billion

Source: Benzinga

Coach's earnings per share decreased 13.8% and revenue decreased 5.3% year-over-year as a result of weaker-than-expected sales of its handbags and slowed customer traffic in its retail locations. Revenues in North America, the company's largest region, declined 9% to $983 million, as comparable-store sales fell 13.6%. Sales were stronger internationally with revenue rising 2% to $425 million, led by an impressive 25% growth in China; however, this appeared to be the only bright spot in the report.

Source: Coach's Instagram

In terms of profitability, Coach's gross profit declined 9.4% to $982.87 million and the gross margin showed immense weakness, plummeting 300 basis points to 69.2%; this sharp decline likely resulted from the highly promotional retail environment during the holiday season, but it also showed that even steep discounts could not draw customers to Coach's products.

Needless to say, it was a very disappointing quarter for Coach and the stock reacted by falling over 6% in the next trading session. Its shares have remained weak in the months since then, and Coach now sits more than 18% below its 52-week high.

Expectations & what to watch for
Coach's third-quarter results are due out before the market opens on April 29 and the current consensus analyst estimates call for another quarter of negative growth; here's an overview:

MetricExpectedYear Ago
Earnings Per Share $0.63 $0.84
Revenue $1.14 billion $1.19 billion

Source: Estimize

Source: Coach's Instagram

These expectations call for Coach's earnings per share to decrease 25% and revenue to decrease 4.2% year-over-year. Key metrics aside, there will be three crucial statistics and updates to watch for:

  1. First off, it will be very important for Coach to provide an outlook on the fourth-quarter that is within analysts' expectations; however, to find this, you must listen to the conference call or read the transcript, as the company does not discuss guidance in its press release. With this being said, the current consensus analyst estimates call for earnings per share of $0.69 and revenue of $1.20 billion, which would represent year-over-year declines of 22.5% and 1.9%, respectively. 
  2. Secondly, watch Coach's gross margin; it has shown weakness over the last several quarters and the company needs to put an end to its free-fall. Jane Nielsen, Coach's Chief Financial Officer, noted that the company expects the gross margin to be around 70% for the second half of the year, so it will be vital for it to deliver on this expectation. In the year-ago period, Coach had a gross margin of 74.1%, so a decline to 70% is bad enough and anything more would be horrendous. 
  3. Last, but not least, watch for the number of shares repurchased during the quarter. About $1 billion remains in Coach's share repurchase program and the company can show that it believes its stock is undervalued by accelerating its repurchases in the second half of the year; this will also help ease the decline in earnings per share going forward.
Although the earnings estimates seem attainable and Coach could easily satisfy the three elements above, I would avoid placing an investment in the company today. The company has disappointed investors and analysts more often than not in recent quarters, so it would be much safer to watch this quarterly release from the sidelines. If we wait, we can then use the most up-to-date financial statistics to make an educated decision on whether or not the company is worthy of a long-term investment. 

A glance at the red-hot competition 
Michael Kors has been dominating the luxury-goods market for the last few years and its success has been a primary factor in Coach's fall from glory. In its last earnings report, Michael Kors grew its earnings per share by 73.4% as its revenue rose 59%, which blew away expectations and caused the stock to soar. It is expected to release fourth-quarter results in late May or early June and here are the results analysts currently expect to see:

MetricExpectedYear Ago
Earnings Per Share $0.68 $0.50
Revenue $821.41 million $597.15 million

Source: Estimize

Source. Michael Kors' Instagram

These estimates call for Michael Kors' earnings per share to increase 36% and its revenue to increase 37.6% from the year ago period. With the momentum the brand is carrying and its continued expansion efforts, there is no doubt in my mind that it will surpass these estimates and this will propel its shares even higher; the real question is how much it will exceed the estimates by.

With negative growth expectations for Coach and 30%+ growth expectations for Michael Kors, it is easy to conclude that Michael Kors is the company to consider investing in today; its stock has fallen more than 10% from its 52-week high and I believe this represents a great entry point for investors who seek a long-term investment in a high-growth company.

The Foolish bottom line
Coach is a troubled giant in a increasingly competitive industry and its upcoming earnings release will likely show another set of negative growth. Foolish investors should avoid placing a new investment in Coach today and instead watch its report from the safety of the sidelines. If you are seeking to make an investment in the luxury goods industry immediately, skip over Coach and take a deeper look at its scorching hot competitor, Michael Kors.