We are only a month into the new year, yet competition among luxury retailers is already heating up. A focal point of investor attention lately has been the rivalry between longtime favorite Coach, Inc. (NYSE:COH) and new momentum play Michael Kors Holdings Ltd (NYSE:KORS). Let’s take a closer look at what each name has to offer, and which stock is a better buy for investors in 2013.
Identity crisis or opportunity?
The retail industry is highly competitive. In the world of fashion, as the saying goes, one day you’re in and the next you’re out. That’s why the winning retail stocks are those that are backed by strong brands and companies that can quickly adapt to changes in consumer tastes.
Coach is the latest example of a company that’s struggling to adjust to customers’ fickle desires. Shares of Coach plummeted more than 15% last month, after the company reported disappointing earnings and announced plans to renovate its brand image.
Coach posted quarterly earnings of $1.23 a share, whereas analysts were expecting $1.28 a share for the period. Second-quarter comps also left much to be desired, with Coach reporting a 2% decline for same-store sales in North America. To see how Michael Kors measures up, we’ll have to wait until next week. The namesake designer is set to report its third-quarter earnings before the market opens on Feb. 12.
Following its dismal earnings announcement last month, Coach said it plans to rebrand the company as a “lifestyle” brand. This decision comes as the handbag maker strives to keep up with fast-growing rivals in the space.
While the idea of rebranding may at first appear like an overreaction to increased competition, the so-called “lifestyle” category isn’t completely outside of Coach’s comfort zone. In addition to handbags, Coach already sells eyewear, jewelry, accessories, and other items that fit perfectly within the confines of a lifestyle brand.
Of course, this strategy isn’t without risk. You see, Coach currently boasts a gross margin of 73%, which is significantly better than Michael Kors’ gross margin of 57%. However, Coach could lose its edge in this regard as it puts more of an emphasis on lower-margin lifestyle products.
The price of growth
Margins aside, Coach is much more reasonably priced than Kors from a valuation standpoint. Shares of Kors have surged more than 75% in the past year, and currently trade around $54 a pop. Shares of Coach, on the other hand, are down more than 29% from a year ago and currently trade around $48 apiece.
Simply looking at the price-to-earnings ratio can often be misleading since it doesn’t take a company’s growth rate into account. That’s where the PEG ratio comes into play. What the above comparisons tell us is that Coach may be slightly undervalued since it has a PEG below 1. Meanwhile, a PEG ratio greater than 1, such as Kors’, often signifies that a stock is overvalued.
More than this, Coach rewards investors with a dividend yield of 2.4%, which is nice considering Kors doesn’t pay a dividend. With shares of Coach down 12% year to date, this may be a good entry point for long-term investors — especially when you consider Coach’s international growth prospects.