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.
If there’s one area where both Coach and Kors are finding growth, it is in international markets. Both brands are experiencing success abroad in key markets such as Japan and China. Coach’s sales in China increased by 40% in the most recent quarter, while same-store sales out of China grew at a double-digit rate.
Coach ended fiscal 2012 with 205 international shop locations in more than 20 countries, and 180 department store shop-in-shops and factory stores operated by Coach Japan. Cross-border growth should give the company a boost in the quarters to come, as Coach continues to expand its operations to more countries outside of the U.S.
As for Michael Kors’ global footprint, the company currently operates 320 stores worldwide. However, 250 of those stores are within the United States. Therefore, the Kors brand has a much wider runway for growth in international markets than Coach. That said, both of these companies’ global businesses represent significant opportunities for growth in the future.
The stock to own
I typically favor growth stocks, such as Michael Kors, but thanks to the recent dip in Coach’s share price, I think it is the better buy now. Both of these companies benefit from strong brands and healthy balance sheets.
As the “it” lifestyle brand of the moment, Michael Kors’ share price has more than doubled since its stock market debut in 2011. But with all this growth, has the stock become too expensive?
The article Kors or Coach in 2013? originally appeared on Fool.com and is written by Tamara Rutter.
Fool contributor Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.