Is Michael Kors the New Coach?


Shares of Michael Kors soared more than 6% in early trading on Tuesday as the fashion house reported better-than-expected earnings for its fiscal 2014 first quarter. However, strong quarterly results aren't the only reason this stock is up nearly 250% since its initial public offering in 2011.

The namesake brand's ability to poach customers from rival Coach is also responsible for the stock's momentum. Let's take a closer look at why Kors is dominating while Coach continues to disappoint.

Going for growth
Kors proved that its stock is still worth its pricey valuation yesterday, with earnings nearly doubling in the quarter. The luxury retailer reported a profit of $0.61 a share. Revenue surged 55% to $640.9 million for the period, trouncing Wall Street's estimates for $0.49 a share on revenue of $571.6 million according to Bloomberg. The good news continued with same-store sales climbing 25% in the U.S. and 56% in Europe.

These results are even more impressive when compared with Coach's recent earnings. Unlike Kors' 25% increase in domestic same-store sales, Coach suffered a near 2% decline in stores open at least a year. Meanwhile, Coach grew revenue just 5.8% to $1.22 billion vs. Kors' 55% revenue growth.

It's easy, then, to see why shares of Michael Kors have gained more than 33% on the year, whereas Coach is down 2% in the same period.

KORS Total Return Price Chart
KORS Total Return Price Chart

KORS Total Return Price data by YCharts.

One of the major problems for Coach is that, unlike Kors, Coach doesn't know who it is. The leather goods retailer is in the midst of an identity crisis as it attempts to transform into a lifestyle brand to better compete with Michael Kors and other namesake fashion brands. Part of Coach's new retail strategy involves broadening its price points and product categories to include jewelry, shoes, and clothes.

Fashion forward
This is a smart move for the struggling retailer, particularly as Coach's handbag sales in the U.S. begin to stall. Just look at the success Kors has achieved outside of its bags and accessories business. Michael Kors' lower-priced clothing line known as Michael helped catapult the brand to early success when it launched in 2004. Today, this affordable luxury segment contributes more than 90% of the company's total revenue. This is clearly a profitable category, and one that Coach can no longer afford to ignore.

Fortunately, Coach is expected to launch its first clothing line in October -- just in time for the all-important holiday shopping season. Still, Coach's foray into women's ready-wear won't be easy given Kors dominance in the space. I plan on waiting on the sideline until we see how Coach's upcoming apparel launch resonates with consumers.

In the meantime, Kors' stock remains enticing, particularly as the brand is rapidly expanding its global presence. The company is set to double its current store count in the coming years, with plans to add around 200 new retail locations in Europe followed by another 150 stores in Asia. This growth strategy should keep the stock's momentum alive in the coming quarters. Nevertheless, the retail landscape is quickly changing -- and some surprising names are capitalizing on this shift.

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Fool contributor Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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