Here’s something that you don’t see every day. On Monday, Michael Kors (KORS) posted strong quarterly results with sales and earnings soaring 43 percent and 50 percent, respectively. The stock plunged 6 percent on the news. A day later, rival handbag maker Coach (COH) saw its sales and adjusted earnings decline 7 percent and 35 percent, respectively. The stock opened higher.
Wall Street doesn’t usually punish growth and reward failure, but it’s all relative here. Kors may have blasted through Wall Street’s top- and bottom-line targets, but analysts were disappointed in the guidance for the current quarter that Kors provided, suggesting margin contraction and that earnings will fall short of expectations. Coach’s quarter was a stinker on the surface, but the market was braced for even more pain. Wall Street pros were forecasting adjusted earnings per share to plunge 40 percent on a double-digit percentage drop in sales.
It also didn’t hurt that Coach had an upbeat demeanor as it talked up its overseas growth, success with its expanding products for men, and the buzz generated by its new creative director that was brought on board late last year to reinvigorate the brand.
It’s Never Entirely In the Bag
The market this week is suggesting that Coach is bouncing back and that Kors is reeling, but the numbers tell an entirely different story.
The market’s concerned that Kors is following Coach’s footsteps down a spiral staircase leading to a clearance rack.
The disparity is surprisingly brutal as we get closer to home. Coach’s North American stores suffered a 17 percent slide in comparable store sales. Retail net sales at Kors skyrocketed 48 percent as the combination of a 24 percent spike in comparable store sales and brisk expansion that resulted in 115 net new stores opening over the past year paid off.
It’s not as if Coach is finally clawing back market share after a rough year and change of declines. It’s still going the wrong way. And it’s not as if Kors is finally feeling the pain after years of growth at Coach’s expense. It’s still growing at a heady rate.
The market’s merely concerned that Kors is in the early stages of following in Coach’s footsteps, and that path goes down a spiral staircase leading to a clearance rack.
In and Out of Fashion
The market’s been bracing for the possibility of Kors proving mortal. Even before Monday’s drop, the stock was already trading nearly 20 percent lower since hitting an all-time high in February. The Kors brand is as popular as ever.
Even the problematic guidance isn’t entirely dreadful. If Kors hits the $950 million to $960 million in sales that it’s forecasting for the current period — and Kors itself pointed out in Monday’s call that its guidance has been historically conservative — we’re looking at top-line growth of 28 percent to 30 percent. Most companies, especially luxury brand distributors, would love to experience that kind of growth.
Yes, that’s decelerating growth. Kors is also eyeing profitability to climb just 20 percent to 23 percent for the new quarter. There is a price to pay in expanding into new lines and giving in to pricing pressures. However, it’s hard to say that Kors is no longer a growth company.
Coach, on the other hand, is starting to show signs of bottoming out, but we’ll have to wait to see if its new product lines, marketing strategies, and brand re-imaging tactics pan out. Along the way, Coach investors are being rewarded for their patience. Coach shells out a generous quarterly dividend. Kors has rightfully decided to invest its money back into growing its store base.
They are two entirely companies in the same niche at different stages in their growth cycles, going about business in different ways. It may have been strange to see the one growing be the one to take a hit on earnings this week, but remember: The market’s always about more than just a single trading day or two.
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 and Michael Kors Holdings. Try any of our newsletter services free for 30 days.