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Elizabeth Montgomery
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I am a former sell-side equity research analyst with +12 years experience covering apparel and footwear brands, specialty retailers, and consumer goods companies. I worked at Cowen, Robbie Stephens, Lazard and Longbow Research. I'm now a stay-at-home mom, but I continue to follow and trade... More
  • KORS Vs COH: Two Very Different Bags 0 comments
    Feb 11, 2013 3:50 PM | about stocks: KORS, COH

    I've been hearing some chatter that Michael Kors (KORS) could report disappointing Q3 results tomorrow morning. I think these concerns are based on Coach's disappointing Holiday results and Coach management's comments that the handbag category slowed and became extremely promotional heading into Christmas. However, I don't think we can extrapolate Coach's Holiday performance to Michael Kors for a couple of reasons.

    First, these brands have radically different market shares in North America. Coach has an acknowledged 30% share of the $10.5 billion handbag market in North America (but I think this share is probably a bit higher, personally). Michael Kors, on the other hand, I estimate at 13% share. At some point, it's just tough to grow your market share (unless you are buying it through promotions at lower margins). So, given Coach's massive market share, I think Coach was likely hit much harder by aggressive promotions than Micheal Kors.

    Secondly, I don't believe that Coach's disappointing North American comps of -2% vs. +8.8% last year should really be attributed to weak traffic or aggressive promotions in the category-but rather to a simple loss of market share caused by blend of problems that are hard to separate, but come down to some combination of merchandising mis-steps given a lack of brand focus (directly stemming from the brand's current massive market share), furthered by the inherent challenges of growing a brand that already has such significant market share (a real Catch-22). Specifically, Coach has grown its logo business way too big and has been slow to refocus on leather. Nothing I see at Michael Kors leads me to believe that any of these merchandising/brand positioning issues are occurring (and, I admit, it's easier to avoid them given the brand's significantly smaller size).

    Finally, Coach's implosion after its 2Q earnings report on 1/23/2013 (with the stock down 19% since the earnings conference call), has less to do with the 2Q results which, while disappointing relative to sell-side analysts expectations, are still impressive with strong margins and very healthy strong cash flow generation. Instead, the plunge reflects COH's extremely murky outlook going forward.

    With Coach management's admission that the brand has lost market share in the US for the first time ever, and with a sweeping new plan to transform the brand from a high-quality handbag brand into a "global lifestyle brand', investors are left somewhat scratching their heads on a range of issues.

    First, how will COH maintain it's sky-high (and likely unsustainable) EBIT margins (which were 32.6% in FY12) while growing the inherently lower gross-margin categories of footwear and ready-to-wear?

    And, probably more confusingly, who (or what) is the lifestyle of the "Coach woman"? Is she a younger woman living it up in the city and focused on of-the-moment style and design? Is she a suburban soccer mom who wants enduring product that's not of-the-moment but classic and durable? What would she wear around town? Would she look like she just stepped out of an Anthropologie store, or instead, that she just breezed out of Saks Fifth Avenue and was whisked uptown in a black chauffered Mercedes? Or does she leave the parking lot of her local Macy's in a mini-van? The answer, of course, is that with 30% market share, the Coach woman is all of these. But how do you create a "lifestyle brand" that represents a full 360-degree head-to-toe point-of-view about how the Coach shopper lives, when they all live so differently and aspire to so very different things? (Not just, "Hey, I'd really like to own a really nice fashionable hand-bag that will last a long-time.")

    How do you appeal across a full-range of products and complete lifestyle imagery to so wide a demographic? Well, it's not easy to answer, and Coach management didn't have an answer on the conference call. Therefore, while we'll all stay tuned to see, there's a huge lack of visibility ahead. In contrast, the aspiration of the Micheal Kors consumer is easy to see and has always been conveyed through a specific lifestyle image-a slim, blond 35 year-old with a modern, luxurious fashion style (complete with leather, fur and lots of bling), stepping off of a recently landed private jet in some exotic locale. That's a pretty narrowly-defined image all right, but it's very clearly an already complete lifestyle brand.

    KORS is heading into its Q3-2013 earnings report tomorrow with a sky-high valuation-trading at 37x sell-side analysts EPS estimates for this year and 28x the average EPS estimate for next year. A valuation like this certainly creates the potential for a sell-off if the company doesn't beat expectations and raise its earnings guidance. But, if we do get a pullback, I will be adding to my KORS position as I think the go-forward brand visibility and earnings prospects over the next 12-18 months are radically different for the two brands, as will be the upside to each companies shares.

    Disclosure: I am long KORS.

    Stocks: KORS, COH
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