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Coach, Inc. (COH), Michael Kors Holdings Ltd (KORS): A Premium Company in the Bargain Bin

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Coach, Inc. (NYSE:COH) took a serious hit last week when the company reported disappointing results for the second quarter. Sales in North America have slowed down lately, and the company is clearly feeling the pressure from trendier competitors like Michael Kors Holdings Ltd (NYSE:KORS). But this is still a very profitable company with a valuable brand and plenty of opportunities for growth, so current weakness looks like a buying opportunity from a long term point of view.

A Mixed Bag

Sales in North America increased by 6% during the last quarter, direct sales were 5% higher, but comparable store sales fell 1.7% versus the previous year. Disappointing North American sales have been a recurrent problem for Coach over the last quarter, and this is the biggest reason for concern regarding the company´s prospects in the middle term.

Management cited soft traffic trends as one of the reasons for the disappointing sales figures, and Ralph Lauren Corp (NYSE:RL) provided confirmation about how challenging conditions are for high end fashion retailers on Wednesday. The company reported a 1% drop in comparable store sales for the quarter, the worst same store sales number that Ralph Lauren has reported in the last five years, and the news sent the stock down by more than 6%.

Coach, Inc. (NYSE:COH)On the other hand, Coach, Inc. (NYSE:COH)’s most serious competitor, Michael Kors Holdings Ltd (NYSE:KORS), is firing on all cylinders. The company reported an explosive increase of 55% in sales for the last quarter, and comparable store sales in North America grew at a whopping 25% versus the previous year. No economic headwinds are hurting Kors, and the company is evidently gaining market share versus Coach in the high end handbags and accessories business.

Michael Kors Holdings Ltd (NYSE:KORS) is in fashion right now, and the company has nearly half the revenues of Coach, Inc. (NYSE:COH), so it has a lot of room to continue gaining market share versus its bigger rival. The way things are going, it looks like Kors will continue being a headache for Coach for quite some time.

On the other hand, investors should keep in mind that this is not a zero sum game; there is room for different successful players in the industry. Michael Kors Holdings Ltd (NYSE:KORS) is trendier and more targeted towards younger consumers, while Coach is more on the classic side. So even if they are direct competitors, at some point both companies should be able to grow and thrive together.

Besides, not everything was bad news for Coach, Inc. (NYSE:COH) in the last quarter–the company is doing remarkably well in China, where sales increased by 35% for the quarter thanks to double digits same store sales. In the last year, Coach increased its revenues in the Asian giant by 40%.

The company has been venturing into men´s bags and accessories lately, and performance in that area is looking quite promising too. Sales in that segment increased by nearly 50% in the last year, so, while Coach is losing market share versus Kors in women´s handbags and accessories, the company is going after Ralph Lauren Corp (NYSE:RL) and other high end retailers in the men business.

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