Compelling Reasons to Sell This Retailer
Jun 12th 2013 4:29PM
Updated Jun 12th 2013 5:20PM
I've been inclined to give Coach a pass over the last year, even when it stumbled over fundamental issues. Today, let's play devil's advocate and look at some of the looming issues at Coach. The company is facing stiff competition, and with its eye always on expansion, it risks losing out on its core demographic.
Michael Kors has managed to stay out in front for a year and a half now, and its sales continue to climb. Other competitors are also lurking, vying for consumer dollars that are at risk of becoming scarce, as Europe drifts backs toward a slowdown and China's growth pulls back.
The worst news Coach has put out this year came in its second quarter, announced in January. The company recorded soft sales in its North American women's handbag line. That's the company's core competency, and any lack of focus could set off a chain of very bad events for Coach. The company managed to save some face in its most recent quarter, and comparable North American sales rose 1%. Management also said that it expected to see high-single-digit growth in American handbags, but that's still just a hope.
The problem Coach is facing is largely the problem of competition. North American comparable sales grew 35% at Kors in its last quarter, with the company draining market share from Coach. The out-and-about crowd is moving away from Coach, and even the celebrity sightings portion of the company's website has started to look like a who's-who of the cutting-room floor.
On the other hand, Kors is still going strong, decking out politicians and celebrities alike. In part, Kors is benefiting from the personality of Michael Kors the man. Coach is so far detached from a designer that it's hard to get excited about. Kors' participation on Project Runway helped promote his brand in addition to his face.
Besides Kors, Coach is going to start seeing more and more pressure from new designers eager to follow in Kors' footsteps. Tory Burch is at the top of my rising stars list, and I'd be surprised if the designer hasn't had an IPO by this time next year.
Global economic concerns
In addition to its brand woes, Coach is also at the mercy of the global market. With slowdowns expected in Europe and China, Coach -- and other luxury retailers -- may be in for a rude awakening. Just last week, the head of the International Monetary Fund said that Europe "could be entering a softer patch." Coach may have made an especially poorly timed move, as it recently bought the other 50% of its European joint venture. That exposure may come at just the wrong time.
Stalwart luxury retailer Tiffany is also seeing some issues in Europe. While comparable sales rose 4% last quarter, the company estimates that a full 25% of its European sales are from tourists. That's going to be an issue if the China slowdown continues, as many analysts have predicted. Coach may suffer from the same issues, and its expansion into China certainly won't be helped.
The combination of the global slowdown and the emergence of new, trendier brands puts Coach in a difficult place. The company has had three major focuses recently: Asia, menswear, and footwear. While I still hold out hope that the brand can generate new revenue and attract new customers with all of those programs, success no longer seems straightforward.
On the other hand, as one of today's hottest high-end fashion brands, Kors has been one of the best-performing stocks in retail. But with all that growth, has the stock finally become too expensive, or is there still room left to run? The Motley Fool's premium report on Kors gives investors all the information they need to make the right decision, covering the must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.
The article Compelling Reasons to Sell This Retailer originally appeared on Fool.com.Fool contributor Andrew Marder 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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