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Alamy We’ve seen this movie before. Coach (COH) posts disappointing quarterly results, leading some analysts to wonder if the luxury handbag market has finally evaporated amid our uneven economic recovery. Then, Michael Kors (KORS) follows a few days later with blowout results, showing that there are still plenty of people willing to pay hundreds or thousands for the right totes, satchels, and clutches.
It’s happened over the past few quarters, and it happened again this time around. Shares of Michael Kors soared on Tuesday after posting great financial results.
Revenue at Kors increased 59 percent during the holiday quarter, topping $1 billion for the first time in the fashion icon’s history. The surge was fueled by nearly 100 new stores opening over the past year, a 27.8 percent increase in comparable-store sales, and even healthier gains at the wholesale level. Net income skyrocketed 77 percent, leading to a profit of $1.11 a share. Analysts had expected earnings of $0.86 a share on $859.5 million in revenue.
It’s a huge win in any kind of operating climate, but it’s even more surprising in light of Coach’s fading ways.
New Kors of Action
Michael Kors’ monster quarter stands in sharp contrast to what’s going on at once-trendy Coach. Two weeks ago, the struggling maker of purses and other fashionable accessories disappointed investors with a 6 percent slide in sales on a crushing 13.6 percent plunge in comps at its North American stores.
It’s clear that Michael Kors has grabbed tastemaker baton from Coach. Well-to-do fashionistas who once wouldn’t leave home without their Coach handbags are now heading out with purses carrying the MK logo. There is no such thing as a timeless brand when it comes to luxury fashion.
Three months ago (when the stakes weren’t as high as they were for the holiday quarter), we saw quarterly sales, net income, and comps slip at Coach. Michael Kors replied a couple of weeks later with a 39 percent pop in sales. The quarter before that it was Coach’s revenue climbing 6 percent, compared to a 55 percent surge at Michael Kors.
In short, this is a trend, not a new development. What can is news is that the gap appears to be widening faster than before, if we go by the latest holiday results.
Investors who saw this shift in taste coming have profited handsomely. Shares of Michael Kors have more than quadrupled since the company went public at $20 less than three years ago.
The stock rose 87 percent in 2012 and another 59 percent in 2013. Things are shaping up nicely in 2014 with the stock hitting a new all-time high after Tuesday’s report.
Coach investors haven’t been as fortunate. Its stock fell 9 percent in 2012, and during last year’s monster rally — as consumer-facing companies were off to the races — Coach shares only mustered a 1 percent advance. The stock is trading sharply lower so far in 2014. Income investors that were drawn to Coach over Michael Kors since it was the one paying a quarterly dividend have missed out. With sales and earnings going the wrong way, investors also need to wonder if the meaty payout is sustainable. A 2.8 percent yield doesn’t amount to much when a stock is flat or declining.
Shares of Michael Kors still aren’t cheap. Nor are its premium-priced handbags. However, at the end of the day, fashionistas are no different than Wall Street investors. They don’t mind paying more for something fashionable if it’s worth it.
Right now, Michael Kors is. Coach isn’t.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach.