Investors have given Michael Kors (CPRI -3.67%) and Coach (TPR 0.67%) a big thumbs-down since the start of 2015, sending shares of Kors lower by more than 38% during that time, with a 5% decline in shares of Coach. The rival luxury retailers are now in a mad dash to try to revamp their respective businesses and earn back customer, and investor, confidence. With both stocks trading near 52-week lows, let's dig deeper to uncover which stock looks like a better pick for the remainder of the year.
Less "jet-set" and more cessna
Once a Wall Street darling, Michael Kors has gotten hammered lately because of back-to-back weak earnings results and declining same-store sales. Investors once recognized Kors as a retail rock star achieving quarterly double-digit same-store sales growth for five years. However, that now seems like the distant past. The high-end retailer reported fourth-quarter results last month in which the highlights included a 5.8% decline in sales from existing stores, an 11% drop in operating margin to 23% of revenue, and guidance for first-quarter revenue of $930 million to $950 million, which was below analyst expectations.
Kors stock has lost half of its value since peaking around $101 per share early last year. Many believe Kors cannibalized its once-aspirational brand by lowering the entry price of its traditional handbags. The fashion house also went mainstream with its lower priced clothing line "Michael," which now makes up a significant portion of its revenue. "Ubiquity is always a problem for high-end labels," said Neil Saunders, chief executive of retail research firm Conlumino, in a March 27 MarketWatch report on Kors.
Source: Michael Kors.
If declining comparable sales and market saturation sound terrifying, don't panic. Michael Kors is still doing plenty right. For starters, the company is aggressively growing its online channel. Kors launched its digital e-commerce flagship in the U.S. last year and has already achieved year-over-year sales growth of 63% from that platform. This is yet another example of Kors embracing its mainstream appeal, even as other luxury brands like Chanel and Burberry are reluctant to sell online for fear of losing their exclusivity.
Growth in overseas markets such as Japan and China is another potential catalyst for the stock. The retailer saw revenue in Japan climb over 42% in the fourth quarter with equally impressive comparable sales growth of 12%. Still, Japan only accounts for 1% of Michael Kors' total revenue, which means there is plenty of growth for the taking. Kors plans to open 10 new stores in Japan this year.
Looking ahead, if the company can focus on mainstream success in foreign markets like Japan, Europe, and Korea, that could help return the stock to its former greatness. Before we jump into Kors valuation, let's see how Coach measures up on the fundamental side.
Fashion victim No. 2
Coach has also had a rough go of it lately. Wall Street pushed the stock down near its 52-week low in recent quarters because of eroding profit margins and slowing sales in key markets such as North America. The retailer's decline started in 2013 amid an identity crisis in which the leather goods and accessories brand attempted to transition to a "lifestyle" brand. It's to be determined whether the company's lifestyle ambitions will pay off, however, Coach has made significant advances with its men's wear business lately. Sales from its men's segment now account for 14% of sales, up from just 10% last year.
Source: Coach.
Coach is also moving into different product categories including clothing lines and shoes for both men and women. Its recent acquisition of luxury footwear company Stuart Weitzman should play into this hand nicely, particularly because the brand's namesake designer will stay on as creative director of the segment. Coach also has room to grow overseas, with international sales currently accounting for less than half of total revenue.
For its third quarter, Coach posted strong gains in both its European and Chinese businesses. Sales in China rose 10% in the period, while sales in Europe also continued to grow at a double-digit clip. Store closures and renovations are another component of the retailer's turnaround plan, which appears on track.
Coach closed 43 underperforming retail stores and 12 outlet locations in North America during the third quarter. "During the fourth quarter, we will be focused on our aggressive remodel and store opening schedule," said Victor Luis, Coach's chief executive. This strategy has worked well for the company, with locations that had full or partial remodels performing better than those that had not during previous quarters this year. The question now is which of these two stocks offers the best bang for your buck?
Unlocking value in the second half of the year
With both of these luxe retailers now trading near 52-week lows, the face-off largely comes down to valuation. Both of these companies are backed by strong brands, which lends a modest economic moat to each. However, I believe Kors is the better buy now based on valuation and its growth catalysts going forward. Kors stock currently trades around $46 per share, or 10 times earnings. The shares look especially inexpensive given its price-to-earnings growth rate or PEG of 1.04, which is below the industry average PEG of 2.18. Coach's PEG of 1.37 is also below the industry average, although higher than shares of Kors. Coach's stock is also trading at a richer price-to-earnings compared to Kors, with a P/E of 27.6 today.
Therefore, Kors seems like a better pick despite Coach's stock trading at a lower share price around $35 a pop today. That's because as Foolish investors (note the capital F), we know that share price alone is not an adequate indicator of a stock's valuation. Moreover, unlike Coach, Kors knows who it is on a brand level and is better positioned to reinvigorate growth as it taps into new markets in the year ahead. As a result, I think the recent pullback in the stock creates an opportunity for patient investors.
