Monday, April 28, 2014

Kors vs Kate Spade vs Coach: What's a better buy?

Which company is a better choice for your portfolio: Michael Kors (NYSE: KORS ) , Coach (NYSE: COH) , or Kate Spade (NYSE: KATE) ?

(related article: athleisure trend)

Coach Inc. has lost some of its business to its much-smaller rivals Michael Kors and Kate Spade & Co.
2013 sales:
  • Coach (COH) $5 billion
  • Michael Kors (KORS) $2.2 billion
  • Kate Spade (KATE) $1.3 billion
Coach (COH)  stock has lost 10% of its value in 2013, compared with a 72% gain in Kors and a 67% jump in Kate Spade (KATE) .

KORS vs COH vs KATE vs S&P500  (June 2015) (click for a live 1-yr chart)

KORS vs COH vs KATE vs S&P500  (April 2014) (click for a live 1-yr chart)

Michael Kors is as hot as it gets
Michael Kors is arguably the most explosive growth name in high-end handbags, shoes, and accessories over the past several years. The company has delivered an impressive growth rate of 47.5% per year in sales through the last five years, and there is no slowdown in sight according to recent financial reports.

Kate Spade (left); Michael Kors (right)

Designer Kate Spade vs designer Michael Kors


Kate Spade was formerly known as Fifth & Pacific and Liz Claiborne before the company sold brands such as Juicy Couture to focus on its namesake brand.

Compared to Kate Spade,  Kors is a larger, more mature company with about four times the share of global handbag market, at 1.7% versus Kate’s 0.4%. Kors also has a larger retail fleet of about 400 stores versus Kate’s 170 stores.

With both retailers still having room to grow and both still dependent on North America for about four-fifths of their sales, both still have plenty of fans on Wall Street. Among 22 analysts covering the stock, 66% of them rate Michael Kors a buy, 23% a hold and 9% a sell, according to FactSet. In comparison, 70% of 10 analysts covering Kate Spade rank it a buy while the rest a hold.

On the other hand, 32% of 38 analysts covering Coach consider it a buy, with 66% a hold.

A recent article from Bloomberg identified the growing scope of luxury accessories in China. As per Bain & Company, Chinese consumers account for approximately 25% of money spent on luxury goods worldwide. This means China has huge growth potential for U.S. brands like Coach, Michael Kors, and Kate Spade, as these retailers offer luxury accessories at lower prices. But up until now, U.S. retailers haven't been able to benefit from the Chinese market to the fullest because of their weak distribution network in the region.

Coach is doing much better in China, with total sales growing by 25% and comparable-store sales rising at "a double-digit rate" in the country during the last quarter.

Coach's new collection from incoming creative director Stuart Vevers will be reaching the market in September, and this will be an important development to watch as it should provide more visibility regarding the company's ability to position itself on the right side of consumer demand under the new creative leadership.

In the meantime, Coach is offering an attractive entry point for investors: The stock is trading at a P/E ratio of 14.3, less than half the valuation assigned by the market to Michael Kors. In addition, the dividend yield of 2.8% provides income while investors wait for Coach to turn the business around and accelerate growth.

Bottom line
Coach's attractive valuation makes it an interesting play for investors willing to bet on a turnaround, especially if the company's new collection reaccelerates growth in the coming quarters. With a smaller size, Kate Spade offers intriguing potential for growth, but valuation is a considerable risk for investors.

Michael Kors is not precisely cheap, but the company is truly firing on all cylinders, and superior performance merits a premium valuation. All in all, Michael Kors looks like the best play of these retailers when considering both valuation and performance.

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