Handbags: Whos hot and whos not.

KATE & KORS

Earnings Preview
5/12/2014

Coach Inc. (COH) - $42.12
Kate Spade & Co. (KATE) - $34.04
Michael Kors Holdings. (KORS) - $91.82

Why Read?

Luxury goods and handbags in particular have remained a resilient and growing subsector of retail. With
luxury spending on the rise, investors have rewarded high growth high margin companies like Kate Spade
(KATE) and Michael Kors (KORS) with equally high valuations. Companies who have failed to protect
their brand equity and popularity like Coach (COH) have been punished, as we have observed in the -9.3%
drop following -21.4% North American comparable store sales results for Coach in 3Q14. There is a lot to
say about each of these names but this note will focus on top-line prospects.
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! Sales Trends: From May 9
th
to May 10
th
we called 52 Nordstrom stores across the nation to survey the
current trends in handbag sales. We chose to exclusively survey Nordstrom because they are one of the
few retailers to sell all three brands (Coach, Kate Spade, and Michael Kors) and generally give
approximately the same floor space to each. Of the stores surveyed, 54% said Kate Spade was their
hottest trending brand, 29% Michael Kors, 15% Tory Burch, 2% Marc Jacobs and 0% Coach.
49% of stores said Michael Kors was their second hottest brand, 32% Kate Spade, 11% Tory Burch, and
9% Marc Jacobs, and 0% Coach. We believe Kate Spade sales will continue to impress, as the brand
becomes the new hot thing in womens handbags. We also believe Michael Kors will still continue to
post strong topline results, although we have concerns regarding market saturation, and believe they
have reached their peak in popularity. Remember, once everyone has whats cool all of a sudden its
not so cool anymore. Coach remains dead in the water, although we received positive comments
regarding older customers, and some associates remain optimistic about the direction of Coachs design
trends.

! Estimates: COH: We expect Coach to generate revenue of $1.05bn vs. consensus of $1.10bn in 4Q14E.
For 4Q14E we expect Coach to earn $0.48 vs. consensus of $0.54. For FY14E we expect Coach to
generate $4.54bn in sales vs. a consensus of $4.65bn. For FY14E we expect Coach to earn $2.67 vs. a
consensus of $2.78. KATE: We expect KATE to post +25% comps for 1Q14E. We expect Kate Spade
to generate revenue of $215mn vs. consensus of $201mn in 1Q14E. For 1Q14E we expect Kate Spade to
earn $(0.02) vs. consensus of $(0.04). For FY14E we expect Kate Spade to generate $1.09bn in sales vs.
a consensus of $1.02bn. For FY14E we expect Kate Spade to earn $0.33 vs. a consensus of $0.25.
KORS: We expect KORS to post +24% comps for 4Q13E. We expect Michael Kors to generate
revenue of $861mn vs. consensus of $816mn in 4Q13E. For 4Q13E we expect Michael Kors to earn
$0.73 vs. consensus of $0.68. For FY14E we expect Michael Kors to generate $4.3bn in sales vs. a
consensus of $4.06bn. For FY14E we expect Michael Kors to earn $4.00 vs. a consensus of $3.85.


#
Sales Trends:





Michael Kors and Kate Spade have continued to eat Coachs lunch, this is what happens when a brand
obtains has been status. What we find most telling is the acceleration in Kate Spades comparable store
sales starting in 4Q12 through 3Q13, and the trend reversal in Michael Kors comparable store sales in 3Q13.
We believe that some of Michael Kors 4Q13 comparable store sales acceleration was from capturing market
share from weaker brands like Coach from once a year holiday shoppers.


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*

From May 9th to May 10th we called 52 Nordstrom stores across the nation to survey the current trends in
handbag sales. We chose to exclusively survey Nordstrom because they are one of the few retailers to sell all
three brands (Coach, Kate Spade, and Michael Kors) and generally give approximately the same floor space
to each. Of the stores surveyed, 54% said Kate Spade was their hottest trending brand, 29% Michael Kors,
15% Tory Burch, 2% Marc Jacobs and 0% Coach. 49% of stores said Michael Kors was their second hottest
brand, 32% Kate Spade, 11% Tory Burch, and 9% Marc Jacobs, and 0% Coach.

Kate Spade led popularity by the greatest margin in the West and Northeast, followed by the Midwest.
Michael Kors still leads in popularity in the South. Handbag popularity runs in cycles. First a brand becomes
popular in major cosmopolitan cities, selling at full price, and creates aspirational status. After this status has
been created, brand sales surge in outlets and begin to saturate 2
nd
tier cities. But lets have the sales associate
tell it as it is:

When I worked in Houston, Michael Kors was all the rage 2-3 years ago, now its not as popular
there but has really caught on here in San Antonio. People take longer to catch on here. Sales
Associate, San Antonio








,

We expect both Kate Spade and Michael Kors will still continue to report strong top line growth, although
the runway for Michael Kors popularity is much shorter than Kate Spades and Michael Kors is in a later
inning. Michael Kors has begun to saturate the market with their more traditional bags and is relying more on
fashion and edgier styles to drive sales. We observed strong sell through in their new pink Hamilton bags, tri-
color bags, and Selma bags. Michael Kors recently changed the leather on their Hamilton bags and darkened
the trim to create newness.

We got 3 pink Hamilton bags in yesterday afternoon, down to my last one today. Sales
Associate, Frisco TX

What was most resounding was sales associates forwardness in recommending AGAINST buying Coach
bags. When asked if buying a Coach bag was a good idea sales associates responded with:

Meh, not so much. Sales Associate, Coral Gables, FL

Dont get her Coach, I wouldnt do that. Sales Associate, Novi MI

Coach is still recovering from the monogram disaster of 2010 Chicago IL

Coach is trying to come back, but theyre dead to me Indianapolis IN

And regarding Michael Kors oversaturating the market and becoming the next Coach:

Michael Kors is the next Coach Sales Associate, Menlo Park, NJ

Michael Kors is getting too gaudy because of the giant emblems and logos Sales Associate

Everyone has Michael now, its not as cool as it used to be. - Sales Associate





%
Wrap-up:

We are very excited now that Kate Spade has transformed into a pure play luxury/handbag company and sold
Lucky & Juicy Couture. Based upon our phone survey and channel checks, we believe Kate Spade has the
greatest runway for growth and will continue to best top-line estimates. That said, dont write off Michael
Kors yet. We expect their growth to shift from core U.S. cities to International and outlet as the brand moves
through the natural cycle of popularity. We expect that customers who shop at Nordstrom are a bit ahead
of the trend in the U.S. so we believe Michael Kors still has another few quarters to a year to run before the
story is over. Coach remains dead in the water and will likely remain so. Based upon our survey, we think
there is an opportunity for Coach to regain some brand share amongst older women and in the high-end
space, especially with the feedback regarding their new styles.

We are most enthusiastic about KATE going into earnings on Wednesday (May 14
th
) as we see the greatest
upside in the name amongst the 3 handbag companies. Although we still believe KORS will still post strong
results for their 4Q earnings (May 28
th
), we believe the stock is currently priced to perfection and will take
extraordinary results to move significantly higher. COH remains on our do not touch or short list for more
aggressive folks. We believe results will continue to disappoint but stress the importance of performing new
due diligence on the name as we move to the back half of the year. Any good news surrounding their new
lines, or even less bad news, could see the stock move higher after taking a beating for so long.
























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