Fashion is a notoriously fickle business. One season you are in, the next you are out. Take the luxury goods companies Michael Kors and Coach. The latter is “aspirational” rather than a super-high-end brand, while Michael Kors is built like a pyramid with a luxury line at the pinnacle balanced on broad-based less expensive lines.
Growth at Coach, the older and more mature of the two, began to fade at the end of last year. Its cloth logo bags have fallen out of style, replaced by sleeker studded versions made by the likes of Michael Kors and others. For the past four quarters, same-store sales in Coach’s core North American market have risen by less than 1 per cent on average. Michael Kors, by contrast, has seen its comparable store sales in the region grow by 37 per cent in the period.
In the equity market, companies also go in and out of fashion – growth stocks one day, value stocks the next. Investors in Michael Korshave watched their investment rise 65 per cent over the past year. The shares now trade on 25 times forward earnings. Coach shares, on the other hand, have lost 2 per cent over the same period and have a price-to-earnings multiple of 14 times. Given the two companies’ diverging fortunes, the differing valuations seem fair.
Coach is cracking the whip in an attempt to stay relevant. It is trying to reinvent itself as a more upscale lifestyle brand, selling a complete range of products against mostly handbags and accessories. The management team is also turning over, including the chief executive, the head of North America and the creative director. Stuart Vevers, formerly of brands including Louis Vuitton, Mulberry and Loewe, will take over Coach’s creative direction.
Investors in Coach, therefore, have to believe that it can return to growth by broadening its products, including the men’s business, as well as expanding internationally. Helpfully, China has remained strong and Coach’s balance sheet is still robust enough that growth can be bought – it has about $1bn of net cash. Finally, management turnover could end up being a blessing in disguise.
Meanwhile, at Michael Kors, already a lifestyle brand, the story is much simpler. Investors are buying its explosive growth, both in the US and globally. Risks involve anything that would derail that growth, chief among them that the brand becomes so popular it cools. A potentially nice but terrifying problem to have.
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