Three boldface fashion names — Coach Inc. (COH.N), Kate Spade & Co. (KATE.N) and Michael Kors Holdings Ltd. (KORS.N) – are reporting quarterly earnings. Let’s look inside their stylish handbags.
KATE seems to be the only one poised to report growth on both top and bottom lines:
Exhibit 1: COH, KATE VS. KORS
Coach road
COH reported on Aug. 4, beating earnings and revenue estimates. Same store sales (SSS) were down by 19%, but that figure also exceeded forecasts. Positive guidance from management also helped boost the stock price. There’s optimism that the acquisition of the Stuart Weitzman footwear business will help the bottom line. It’s a smart partnership, since the Weitzman brand features upscale dressy shoes and compliments the Coach brand.
Looking forward, Coach’s SSS are still expected to be down but no longer in the double digits and gradually improve over the next four quarters:
Exhibit 2: COH Same Store Sales Actual and Estimates
Source: I\B\E\S data
Near-term outlook
Analysts expect similar patterns ahead for revenue and earnings per share. EPS projections show that the company is expected to continue to improve in terms of earnings and revenue entering the holiday season.
However, it’s not all rosy. Analysts polled by Thomson Reuters seem to be concerned that COH might be relying too much on outlet sales to generate revenue, which can hurt profits and also might suggest that the pricing for their leather goods might not be right. Too many discounts could tarnish the brand’s luxury image. COH also lost some market share when it was renovating its stores.
Exhibit 3: COH Stock Recommendation
Source: Eikon
Some good moves
Coach’s move to close underperforming stores is good, and investors appreciate that the company is discounting less than in the past. The Aug. 4 results also show an improvement in margins, which are stronger than the industry average.
Looking at the StarMine scores, it is evident that the company has a high Earnings Quality score (96) – which places it in the top decile, and suggests that earnings are coming from sustainable sources.
What’s more, the company’s cash flow component has a score of 98 out of 100 — which suggests that the company has solid cash.
Exhibit 4 : COH StarMine Model Scores
Source: Eikon
Competition
KATE and KORS are scheduled to report later this week. Still, when comparing all three retailers, Coach has the most revenue and has been in business the longest:
Exhibit 5: COH, KORS, and KATE Revenue
Source: I\B\E\S data
The KORS picture
Analysts polled by Thomson Reuters are bearish are on the company, because they believe it has grown so much that it has over-saturated the market. It’s facing difficult growth comparisons and its StarMine Intrinsic Valuation and Relative Valuation scores suggest that the stock might be cheap.
Exhibit 6: KORS StarMine Scores
Source: Eikon
The market-implied growth rate suggests that the company will contract, rather than grow. However, StarMine suggests a growth rate of 5.0%. Taking these numbers into consideration, the stock is trading at about $38.36, but StarMine suggests it should be valued at $59.11.
Exhibit 7: KORS Intrinsic Valuation
Source: Eikon
KORS has a StarMine ARM score of 3, which places it at the bottom decile of all U.S. companies with respect to this measure of change in the way analysts perceive the outlook for the company. The lower a company’s ARM, the more top-ranked analysts have been lowering their earnings forecasts and the greater the likelihood that they will continue to do so.
Analysts polled by Thomson Reuters are bearish on the fact that the company grew so fast that Kors merchandise is everywhere (Macy’s, outlets, independent stores) and this could hurt the brand image.
Moreover, they also want to see margins improve and don’t want to see further expansion (which means higher capital expenditures and lower margins.)
In general, the stock recommendation is Hold.
Exhibit 8: KORS Stock Recommendation
Source: Eikon
Bullish outlook at KATE
Of the three companies, KATE is the only one to see growth in both revenues and EPS. Analysts polled by Thomson Reuters are most bullish on this stock. They cite improve store traffic, customers buying at full price, strategic discounting, strength in apparel and shoes (stronger than handbags) and stronger appeal for Millennials – now the largest population group.
Exhibit 9: KATE EPS and Revenue Growth
Source:Eikon
However, the StarMine IV and RV models suggest the stock is expensive. It’s trading at $20.63 and the IV score indicates a price of $11.57.
Exhibit 10: KORS StarMine Model Scores
Source: Eikon
Nevertheless, analysts polled by Thomson Reuters are quite bullish on the company’s performance and stock:
Exhibit 11: KATE Stock Recommendation
Source: Eikon
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