There Is Still Money to Be Made in Handbags

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As consumer's purse strings begin to loosen, the higher-end items should come back in favor. This is a big positive for high-end retailers, such as Coach and Michael Kors .

The story that Michael Kors is taking market share from Coach is well told. During its first fiscal quarter of 2014, Coach's North America sales were down 1% year over year, thanks to disappointing results from women's bags and accessories. Meanwhile, Kors saw sales growth jump 31% in North America last quarter. Driving Kors' growth was footwear and accessories. 

However, Coach's international segment remains strong, especially in China. Sales were up 35% last quarter in the region. Additionally, helping to hedge the decline in its North America business should be better margin management.


One concern is that Coach has gotten desperate and is diluting its brand with outlet stores. L Brands CEO, Les Wexner, said in an analyst meeting that:

"Coach became a discount outlet. They cut their own throat. The outlet business is easy money, [but] discounting yourself is the beginning of the end. I can't find the exception. It's hard to have a dual identity. Outlet doesn't build a brand. We don't milk it."

But while that might be true for some retailers, it appears that Coach has been successful with its outlet strategy. Coach's outlet stores now make up 60% of its retail sales in North America, up from about 30% in 2006. The outlets have become more profitable than its full-price stores, bringing in about $600 more in sales per square foot.

Enough to go around
Tiffany  had a great quarter and the stock jumped nearly 10% last week. This is a big positive for the high-end discretionary products market. It shows that the higher priced items are indeed selling, meaning more consumers are loosening their purse strings.

As well, demand was very strong in Asia, and with the help of product cost cuts, gross margin managed to widen. Same-store-sales jumped some 22% last quarter in Asia. This is evidence that the luxury market is set to outpace that of the overall market, and that there might be more gains in store for the luxury retailers, like Michael Kors, Tiffany, and Coach. 

Coach has a stunning return on equity of 47%, and a debt to equity ratio that's less than 5%. Compare this to Tiffany's 17% ROE and 35% debt to equity. Coach is well positioned to continue its international growth. When you throw in Coach's 2.2% dividend yield, there appears to be plenty of upside left in the stock. 

Bottom line
Let's face it, North America may remain weak, but it's the global story that makes Coach's stock a buy. Too many investors are focused on the fact that Michael Kors is taking Coach's U.S. market share. But Coach is looking to increase its square footage by 9% globally.

The other key story for investors is that Coach is looking to hedge the decline in handbags by becoming a "lifestyle" brand. This includes increasing its offering of accessories and footwear. As a result, Coach still remains a solid investment, and it trades at only 15 times forward earnings, while Michael Kors trades at 24 times. 

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The article There Is Still Money to Be Made in Handbags originally appeared on Fool.com.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool 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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