Accessories on the Rise
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Coach (NYSE: COH) increased 5% recently after being raised to a buy rating by a Canaccord Genuity analyst. The analyst stated that the recent drop in the upscale handbag and accessories maker’s shares makes it an attractive investment. Analyst Laura Champine noted that the company’s shares have fallen about 10% so far this year, while shares of similar luxury retailers have risen. Coach has a 28% share in the U.S. handbag market, 17% in Japan, and 6% in China. The company’s shares are currently trading at about 25% of other luxury retailers, where they have historically traded at about 15% below. According to Champine: “We do not believe this discount is justified, given that Coach boasts industry-leading margins and returns.” Coach does have a good track record. The company has beaten Wall Street estimates in 85% of all quarters for the past five years. However, in the most recent quarter, sales missed analysts’ projections in addition to the company’s own projections. The company is facing rising competition from companies such as Michael Kors (NYSE: KORS) that are finding their way into the handbag category Coach previously dominated.
In the same quarter, Michael Kors’ sales increased 37%. If Kors meets its current year targets, the company can gain another 3% of market share. Michael Kors, once a failing design company, is now a growing brand in the handbag and luxury market in general. Already at over 9% market share, another 3% would make it an even stronger competitor for Coach to contend with. Also, the company is now planning to double its stores in China by the end of the year. This would make it even more difficult for Coach to gain market share there, now its smallest market. In the first quarter of 2012 Michael Kors had a net income of $147 million. Since the company went public in December 2011 the stock has soared 144%, making it one of the most successful IPOs in recent history. The company has grown in the past and is making plans to grow in the future.
But handbags are not the only accessories doing well these days. Fossil (NASDAQ: FOSL), known for its watches and other accessories, saw shares increase 27% after the company released their second quarter report recently. Earnings increased by 12%. Broad-based sales accelerated in the company’s wholesale segment. Wholesale in Asia and improving performance in Europe is expected to drive earnings even further for the company this year. The strong results and upbeat outlook boosted the company’s market value to $5.7 billion. Many luxury retailers are experiencing a slowdown in Europe and Asia as a result of the continued economic crisis. However, this ‘affordable luxury’ brand continues to grow in these markets. In January, Fossil bought Skagen Designs, a Danish watch maker, to assist with their Europe expansion. The company is expanding its market share when other luxury retailers are struggling to retain theirs in the same markets.
As is the case in other industries and segments, luxury and upscale spending still continues. It has begun to slow in the European and Asian markets, however. But the small slowdown has not yet had a large impact on luxury retailers’ bottom lines. Companies such as Coach, Michael Kors, and Fossil, are still continuing to grow in these markets and elsewhere.
MaryPosey has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach and Fossil. Motley Fool newsletter services recommend Coach and Fossil. 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.If you have questions about this post or the Fool’s blog network, click here for information.