In my brand-value focused Tesla (NASDAQ:TSLA) article, Tesla Brand is Crown Jewel To Major Automakers, written this past December at $137 -- I referenced Michael Kors' (NYSE:KORS) trouncing of incumbent, Coach (NYSE:COH) -- as a way to illustrate the reality of Tesla's rapidly increasing brand cache at the expense of incumbent automakers. In both cases, I disregarded P/E multiples and near-term growth projections -- instead focusing on qualitative, intangible sentiments that drive the herd-like behavior of consumers (not unlike the behavior of investors).
It is perfectly reasonable to do this, if we: 1) agree markets are generally efficient, 2) use relative valuation to exploit special situations 3) pair trade to help eliminate market and industry-specific risk.
To set up this Kate Spade (NYSE:KATE) bull thesis (and Michael Kors bear thesis) -- I don't think I can articulate the edge I have more clearly than quoting the aforementioned article. Please observe the situation from last year:
"The highest conviction investment idea I have ever had (with virtually no chance of significant loss) was to pair trade [a newly emerging] brand, Michael Kors, and a 70 year old incumbent, Coach, over the past year (buy KORS and short COH). Speaking with my fashionista sister-in-law and many other women -- it was unmistakable that Michael Kors products were, and are, far more desirable to key customer segments. The stronger brand was trading in and around a 50% discount to the brand whose lunch it was eating.
So although Coach had, and even still has, greater sales and net income than KORS -- because of this increasingly obvious brand strength -- the market is now also convinced that it is only a matter of time before KORS ramps up distribution to become more profitable than Coach. (KORS now has a higher market cap with a much higher multiple). This is rational, forward-looking behavior -- finally.
Though, there are distinct differences between ramping up handbag production and automobile production, I do believe the Tesla brand is, in a very similar way, already stronger than BMW, Audi, Mercedes, etc. At least for the consumers that currently matter -- the affluent. Side by side with the excitement of the Model S, all of these brands seem dull and tired. Like owning a BlackBerry (NASDAQ:BBRY) and a Coach bag in 2011 (what will happen 2-3 years later?). Thus, a very large and growing portion of wealthy people -- who are into their cars -- are jonesing after the Model S. The question now is production and distribution -- something that perhaps a few other companies might have a capacity for…"
Let's bring it back to handbags and women's fashion.
In the same way that Michael Kors leapt ahead of Coach in brand power, as many as 2-3 years before it did the same in market cap; and not unlike the way Tesla is seemingly making the brand cache of Audi, Maserati and Lamborghini irrelevant -- I'm now convinced that Kate Spade (along with Tory Burch*) has Michael Kors by the neck. This is evident from my ground-level research in Toronto, conversations with my my fashionista sister-in-law and others, as well as Internet sources I am not, at the moment, willing to divulge.
Quantitatively bent investors must remember that customer taste acts as a leading indicator, preceding financial performance. Late adopters will always be left holding the bag (pun intended).
KORS: $16.3 billion : Kate Spade: $4.1 billion
= ~ 4 : 1
*Tory Burch is a privately owned 'affordable luxury' brand that does convolute the comparison. This is a non-issue, however, utilizing the pair trading strategy -- shorting the brand-at-risk, Michael Kors.
Disclosure: The author is long KATE.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: And also short KORS