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Holiday Shopping: Coach, Kors Or Kate?

|Includes:Coach, Inc. (COH), KATE, KORS

Sector Outlook

The US retail sector has been sluggish this year, with ETFs that track consumer discretionary spending posting negative YTD returns (XLY -0.78%, VCR -0.89%). This has hit everyone from brick-and-mortar retailers like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) to online retailers such as Amazon (NASDAQ:AMZN), which has declined from around $400 at the beginning of the year to $331.30 now.

However, this malaise is set to end soon. I think there are positive near-term catalysts lurking around the corner, and anticipate a strong holiday shopping season.

Andrew Lipsman pins lukewarm consumer spending on an uptick in the housing sector, which is temporarily dragging down spending on discretionary items. Saving up for a down payment and associated expenses in the summer made consumers temporarily strapped for cash. Weak consumer spending is, counterintuitively, a sign of the economy's robustness rather than it's frailty.

Additionally, investors appear to be bullish on retail, with positive inflows into consumer discretionary ETFs, discussed in this article.

Also, there is bullish activity among options for stocks such as Michael Kors (NYSE:KORS).


Let's look at handbags. There are three publicly traded companies in the US that sell purses and handbags: Michael Kors (KORS), an up-and-comer, Coach (NYSE:COH), a strong brand which has seen weakness in recent years, and Kate Spade (NYSE:KATE), whose brands include Liz Claiborne.

All three have been beaten up by the market this year. Coach has been hit hardest, posting a 35% YTD decline, and trading 36% off of its 52-week high. KORS is off 3% YTD, and is 22% off its 52-week high. Kate Spade is down 2.56% this year and 28% off its 52-week high.

If we think the market for cyclical goods such as luxury items is about to turn around, it would make sense to snap up some stock in these beaten-down retailers before they can bounce back.

But which one?

KORS: The Star

Coach's troubles the past two years are due in large part to the rise of a new competitor, the hot new Michael Kors brand. KORS is a star, and analysts love it. Standard and Poor's gives it 5 stars and projects a target price of $92 (up from $78, where it is now).

Analysts project that earnings per share will grow 23% annually for the next 5 years. KORS is well managed, with a whopping 42% return on equity according to Finviz.

KORS generates 80% of its sales from the United States according to Standard and Poor's, and so there is plenty of room for international expansion.

Solvency: KORS has no debt and is very liquid.

Profitability: KORS has a high profit margin of 20%.

Valuation: Due to its rapid growth, KORS trades at a somewhat high multiple of 8 to its underlying book value. Finviz puts its P/E ratio at 22 and its trailing twelve months P/E at 16.47. However, taking into account its rapid projected earnings growth, its PEG ratio is a low 0.92.

KORS makes a great choice for the growth-minded investor. Here is a chance to own your part of a compelling growth story, a rising star that is shaking up the handbag industry. Get it while it is low.

Coach: A well-respected brand in need of a turnaround

Coach is the leader of the US leather industry, but has fallen on tough times. Coach was founded in 1941, 40 years before KORS.

Coach's return on equity, a measure of management effectiveness, has slipped from a 2012 high of 57.6% to 47.0% in 2013, according to Standard and Poor's. Earnings per share for the fiscal year 2014 ended June 30 fell some 23% from $3.61 in 2013 to $2.78 for 2014.

As said before, its troubles are due in large part to the rise of Kors, as this article in the Motley Fools states: "Coach's portion of the handbag market fell from 19% to 17.5%. In the same two-year time period, Michael Kors increased its portion of the handbag market from 4.5% to 7%."

Management recognizes that Coach must step up its game, and is trying to turn the company around. Coach's return on equity is still enviably high.

Solvency: Coach has low debt as well, and is also liquid.

Profitability: Its profit margin of 16.3% is not too far off from that of KORS.

Valuation: Due to its difficulties and low projected growth (5.75% annually for the next 5 years), Coach trades at a discount to its peers. Its price/book is a reasonable 4, and its P/E is 13 vs. 22 for KORS. According to Standard and Poor's, Coach's P/E traded in a band between 12 and 20 for 2013, 13 and 17 for 2012, 14 and 23 for 2011, and 14 and 25 for 2010. Excepting the years 2008 and 2009, when it fell as low as 6, Coach's P/E is near historical lows. Back in 2006, its low was 20, and in 2005 the ratio never went below a whopping 25.

Perhaps Coach will be able to fight back and win back some market share, especially in new markets such as China.

At its current low valuations, Coach represents a potential opportunity for value-minded buy-and-hold investors who believe in the ability of this proven leader to claw its way back to dominance.

Kate Spade (KATE)

Kate Spade has turned around, improving her liquidity and returning herself to profitability.

The data on P/E, debt, book value, stockholder's equity and net income is a bit conflicting.

Solvency: While liquidity appears to be improving (data is conflicting here), it still is indebted. Book value and shareholder's equity are both very low.

Proftability: Finviz puts the profit margin at 5.6%, below Coach and Michael Kors.

Valuation: Kate Spade doesn't appear too exciting as a value play. KATE is trading at a premium to her peers on measures such as P/E and price/book. Due to KATE cleaning up her balance sheets, book value and shareholder's equity are both very low. Finviz puts the price/book at an extremely high 59. As KATE has just returned to profitability and net income is still low, the company trades at a very high P/E of 47 according to Finviz. Finviz projects 5-year earnings growth at 10%, lower than KORS. Earnings will probably grow rapidly as they are starting from a very low base. According to Finviz, KATE has a net income of $58.9 million on sales of $1.35 billion, while KORS dwarfs this with a net income of $724.2 million on sales of $3.59 billion, and COH earned $781.3 million on sales of $4.81 billion.

There is upside, and analysts are optimistic with their price targets for KATE, but it comes with liquidity risks.


Remember to do your research when allocating your money and selecting stocks. All entail the risk of losing your capital. If earnings slow at any of these companies, the price will fall.

In summary

Now might be a good time to buy some luxury goods stocks as the market may very well pick up in the holiday season.

Which one will you buy for the holidays?

Coach: Brand leader facing hard times, good potential value play if it can turn itself around. A great gift for the buy-and-hold value investor in your life.

Michael Kors: Well-managed, fast-growing company, chance to buy while it is temporarily cheap. A wonderful present for any growth investors you know.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in KORS over the next 72 hours.