Is Mass-Market a Dirty Word for These Stocks?

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Just in April, NY Magazine fashion blog The Cut called Coach (NYSE: COH) more "mass-market" than its own Reed Krakoff brand, noting that Krakoff's decidedly pricey and high end wares brand didn't fit with Coach anymore. The article made it sound like mass-market was a dirty word.

Some back-story is in order. Reed Krakoff is the Executive Creative Director at Coach who is leaving to focus on his eponymous brand of luxury accessories and apparel. He helped CEO Lew Frankfort build the brand into the international apparel and accessories success story it is. Krakoff will be succeeded by Stuart Vevers.

Interestingly, The Cut surmises the move of Vevers to Krakoff's position may be a signal of more expansion into the European and Asian markets as Vevers headed up trendy accessories line Loewe, well known in those regions.

Reed Krakoff's high-end brand is being shopped by Coach as it's been a money losing brand according to The Wall Street Journal. Coach is, meanwhile, morphing into a lifestyle (is that code for mass-market?) brand with more apparel like rival Ralph Lauren.

The WSJ article noted that Coach has lost customers to Michael Kors (NYSE: KORS) and privately held Tory Burch. Coach is also losing ground to kate spade, owned by Fifth & Pacific (NYSE: FNP).

Has the easy money been made?

Last year, Michael Kors was the name getting all of the Street's love as the best performing IPO of 2011-12. The stock has performed well, it's up 62.49% over the last year, but not a skyrocket like Fifth & Pacific, up over 155% in the same time frame.

Maybe, it has just lost its IPO buzz, now that most of the insider selling by CEO John Idol and founder Michael Kors is over and short interest has declined to 2.40%, quashing the profitable short squeezes of yore.

The days of 70% and 56% earnings surprises are probably over and now it comes down to the day to day for Michael Kors. At a trailing P/E of 32.40 and an EV/EBITDA of 18.12, has the easy money been made?

Analysts still like the name and keep raising the median price target, now at $74, up from $65 just in January and give it a 28.73% five year EPS growth, more than twice what analysts foresee for Coach at 11.80%. In Michael Kors' favor is its low PEG of 0.87 and no debt.

Asia has been the driver of profits for both Coach and Kors, as their accessories, particularly bags, are recognizable from across a room -- very much an advantage in their largest markets in Asia, where status can't be flaunted with flashy cars and big houses. In Q2 2013, Chinese sales rose 40% yoy for Coach while North American sales barely rose 1%.

Coach is much more the value name at a 15.95 trailing P/E, fairly low for a retail stock, and it offers a yield of 2.30% at a 32% payout ratio. The company raised the yield 13% in April.

Coach is only up 3.27% this last year, yet analysts have a $65.00 median price target for a 10% upside from its July 12 close of $59.00. Coach has all its succession ducks in a row now with Victor Luis, who spearheaded its Asian expansion, to take over from Lew Frankfort as CEO in 2014. Frankfort will stay on as Executive Chairman.

Is mass-market a dirty word for retailers?

Mass-market shouldn't be a dirty word for Coach as its outlets make the brand affordable for the aspirational. Even Michael Kors has a lower price point line of men and women's clothes, Michael, for the aspirational with more style than money.

Meanwhile, both Michael Kors and Coach need to look over their shoulders at Fifth & Pacific, whose kate spade has been rolling out a tier-two line, Saturday, in Japan and the U.S. for its fans with less money than style. The company plans to take it to emerging markets like Russia, India, and Mexico. The Huffington Post called Saturday a challenger to "mass-market preppy favorite J. Crew."

kate spade New York and its menswear line, jack spade, are on pace to open 65 retail stores this year with ambitions for 400 stores in more than the current 20 countries by 2016. kate spade added net sales of $173 million to Fifth & Pacific's coffers last year, a rise of 56.8% for this one brand. kate spade was also early to Asian expansion, opening stores over nine years ago.Its kate spade e-commerce database grew 50% in 2012.

Even better news for Fifth & Pacific, the former Liz Claiborne, would be a decision to sell off lackluster Juicy Couture and Lucky brands. Juicy Couture has definitely lost its juice as a brand with consistently declining sales. Its original founders are rumored to be trying to buy it back from Fifth & Pacific says Women's Wear Daily.

Although Lucky, a denim brand, has performed marginally better than Juicy, kate spade is the driver of profits for Fifth & Pacific. The company boasted average sales per square foot of $1,100 at existing Kate Spade stores, with Lucky stores only bringing in $462 per square foot.

Fifth & Pacific is close to 52-week highs despite reporting a loss of $0.33 per share at its latest earnings release in May. The forward P/E is 60.45. However, numbers are improving from the prior year's loss of $0.51 with kate spade sales up 22% for the quarter.

The high end tightrope

All three of these apparel companies have to walk a fine line of attracting the aspirational with their cachet and high prices, while still offering a lower price alternative. And they have to do this without falling into the "mass-market mire."

I liked Fifth & Pacific better when I first wrote about it when it was some 100% lower, but it has a compelling turnaround story and that tier two line, Saturday, should show good numbers at the next earnings release. A sale of Juicy and Lucky would also boost the stock.

I always hesitate to recommend Michael Kors and yet it continues to surprise. This is still an "at your own risk" story. Coach seems oversold still. Coach continues to raise the yield and succession problems are solved now, so buy with my blessing.

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AnnaLisa Kraft 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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