Michael Kors Holdings Ltd (NYSE:KORS) is looking to diversify its product line into men’s sportswear, shoes, and leather goods, strategies that have been closely followed by Coach, Inc. (NYSE:COH). For the full year, Kors expects same-store sales to rise 15% to 20% — outpacing not only Coach, but most of its comparable industry peers.
Michael Kors Holdings Ltd (NYSE:KORS) is a solid growth stock, but with great earnings come ever higher expectations. The stock is trading at 34 times trailing earnings, compared to a P/E of 14.3 for Coach and 22.7 for Ralph Lauren Corp (NYSE:RL). This means that any sign of weakness in Kors’ first quarter earnings could cause the stock — which is already up 62% over the past twelve months — to nosedive.
The hidden gem: Kate Spade
No article about affordable luxury would be complete without mentioning Kate Spade. Kate Spade, which produces handbags, accessories, clothing and footwear, is rising just as fast as Michael Kors. Kate Spade is the largest of Fifth & Pacific Companies Inc (NYSE:FNP)’s primary fashion brands, which also include Lucky Brand and Juicy Couture.
Last quarter, sales of Kate Spade’s products rose 63.1% year-on-year to $141 million. Same-store sales surged 22%. However, Kate Spade’s robust growth was offset by slumping sales at Juicy Couture, which reported a 10.7% decline to $98 million. Lucky Brand, its contemporary clothing brand, helped offset Juicy Couture’s decline with a 16.5% increase in sales to $117 million.
Faced with mounting evidence that Juicy Couture, which rose to prominence on the popularity of its trendy velour track suits, is falling out of fashion, the company hired a new CEO last year to help turn around its lagging performance. Last quarter’s results definitely didn’t show the improvement that Fifth & Pacific was looking for, and the company is now reportedly looking to sell or spin off Juicy Couture.
If Fifth & Pacific is successful at spinning off Juicy Couture, I believe that this stock could really take off. For now, however, the company is still unprofitable, and there is a major disparity between its surging stock price and its lackluster revenue growth.
The Foolish bottom line
As Heidi Klum states every week on Project Runway, “In fashion, one day you’re in, and the next day you’re out.” In my opinion, Coach, once the best growth stock in affordable fashion, is definitely out, and its smaller rivals, Michael Kors and Kate Spade, are in.
Coach, Inc. (NYSE:COH) is playing with fire by relying heavily on outlet sales to carry its top line growth for the rest of the year. That move could irreversibly cheapen its brand and drive more prospective customers to Kors and Kate Spade instead.
Michael Kors Holdings Ltd (NYSE:KORS) is a clear winner in this sector, but investors should be wary of overly optimistic growth forecasts, which could sink the stock. Lastly, Kate Spade is a rapidly growing brand that is enjoying as much success as Michael Kors, but it must first break free of Juicy Couture and Fifth & Pacific Companies Inc (NYSE:FNP)’s other weaker brands to truly thrive.
The article A Loser, a Winner, and a Hidden Gem in Affordable Luxury originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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