A University of Minnesota marketing study has concluded that women buy high end accessories not so much to signify economic status, but as a signal to potential rivals. That Coach, Inc. (NYSE:COH) purse or Tiffany & Co. (NYSE:TIF) bling supposedly says,” I’ve got a rich man who won’t look at you. See this purse (shoes, watch, necklace)..It’s one among many he lavishes on me!”
High end…hands off!
PH.D student Yajin Wang, who worked on the experiment, explained:
“We found that a woman who is wearing luxury items and designer brands is perceived to have a more devoted partner and as a result other women are less likely to flirt with him. Regardless of who actually purchased the items, other women inferred that the man had something to do with it and is thus more devoted to her.”
I’m not saying I’m buying the premise wholesale, but there is a golden nugget of truth with a $250 billion luxury item market for American women. The study is certainly timely with Coach, Inc. (NYSE:COH) reporting earnings this week.
Such a deeply buried psychological impulse should be hard to discount, yet Coach, Inc. (NYSE:COH) hasn’t performed well this year, down 2.31%. It offers a 2.30% yield and has a trailing P/E of 16. The company raised the yield 13% in April and still, the stock doesn’t move like Michael Kors Holdings Ltd (NYSE:KORS), its inevitable comparison.
I have decried the glitziness of Michael Kors Holdings Ltd (NYSE:KORS) apparel, but now it all makes sense…even the most myopic can recognize a Kors purse from a distance. At least women can, which makes its apparel, jewelry, watches, and accessories all the more attractive as a signaling device. To mangle a Mark Twain quote, it’s like the difference between lightning and lightning bug.
Last year, Michael Kors Holdings Ltd (NYSE:KORS) was the name getting all of the Street’s love as the best performing IPO of 2011-12. The stock has performed well, up 56.49% over the last year. Its trailing P/E is twice that of Coach, Inc. (NYSE:COH) at 32.91 and its EV/EBITDA is 17.52, but the return on equity is a stunning 52.89%. The PEG of Michael Kors is 0.87, signaling it may be slightly undervalued with its higher growth profile.
Coach has a better gross margin of 74.12% to Michael Kors Holdings Ltd (NYSE:KORS)’ 60.22%, but Coach’s North American sales are going to Kors as The Wall Street Journal noted earlier this month. With no debt weighing it down, Kors continues its torrid pace of expansion as the company opened another 66 stores at the end of 2012 for a total of 237 retail stores.
Part of the problem with Coach may be all its outlet stores have actually made it a mass-market name as New York Magazine has charged and Cowan & Co analyst Faye Landes agrees. At the outlets, Coach, Inc. (NYSE:COH) accessories can run half what they cost retail. The company has 354 full-price stores to 169 outlet stores. While Michael Kors Holdings Ltd (NYSE:KORS) has a tier-two line that’s more affordable, called MICHAEL, it doesn’t affect its high end image since the company doesn’t have outlet stores. It’s not just that an item has to look expensive, it has to be expensive.
Coach, Inc. (NYSE:COH) does have a strong Asian presence with 300 retail venues in Hong Kong, Macau, Singapore, Japan, Taiwan, and China, with much of the success of the stock predicated on strong Asian sales. Its mens accessories also tend to perform better as economic status is not flaunted by cars or big houses. Also, with a business culture that runs on gifting but governments that frown on too conspicuous a display, Coach items are the perfect compromise.