Michael Kors Brand Takes on Coach in U.S. Luxury Market

Michael Kors, Coach May Be Headed for Handbag Smackdown
A `Hamilton' tote from Michael Kors Holdings Ltd.'s line MICHAEL. The tote retails for $348. Source: Michael Kors Holdings Ltd. via Bloomberg

Coach Inc. faces an upstart with momentum and brand recognition. His name is Michael Kors.

Since the designer’s company went public three months ago, his ambitions have become clear. Michael Kors Holdings Ltd. aims to more than double its North American store fleet to 400 and more than quadruple to 1,000-plus its department-store boutiques. Michael Kors will operate in malls and street locations, like Coach, sell accessories-heavy collections, like Coach, and focus on “accessible” luxury, yes, like Coach.

While both companies can thrive in the fastest-growing part of the U.S. luxury-goods sector, Kors may steal Coach customers.

“This is the first mega-brand emerging to take them more-or-less head-on in a direct hit,” said Steven Dennis, founder of Dallas-based SageBerry Consulting LLC. “That’s definitely going to impact Coach’s business.”

The fragmented fashion accessories category is ripe for competition and has attracted droves of growth-hungry bag makers and investors. Coach said the North American handbag and accessories market has been expanding at a rate of 10 percent. In 2011, Americans spent $8.5 billion on bags, according to Accessories magazine, an industry bible. Coach is now worth $22.7 billion and Michael Kors $9.1 billion.

“It is a category that has been on fire and it has caught people’s eye,” Michael Binetti, an analyst with UBS AG in New York, said in an interview. U.S. brands such as Ralph Lauren, Kate Spade, Tory Burch and even jeweler Tiffany & Co. are all chasing accessories-happy shoppers.

Shares Doubled

Michael Kors’s shares have have more than doubled from their $20 offering price in mid-December, while Coach has advanced by about a third since then. The Standard & Poor’s Supercomposite Apparel and Accessories Index gained 28 percent.

Andrea Resnick, a Coach spokeswoman, declined to comment for this story in keeping with the company’s long-standing policy of not discussing competitors.

When Michael Kors, a Long Island native and Fashion Institute of Technology dropout, unveiled his namesake collection 30 years ago, he focused on pricey, elegant yet sporty clothes that appealed to Upper East Side ladies-who-lunch. Later, red-carpet denizens such as Angelina Jolie and Gwyneth Paltrow began wearing his gear.

By 2004, Kors and his team had decided that cheaper accessories were the more profitable way to go and he added his secondary line, MICHAEL Michael Kors.

Leather Tote

Today, accessories -- which represent more than 62 percent of revenue -- are driving sales growth, Kors, 52, said in a backstage interview last month before his fall 2012 fashion show in New York. They include a large tangerine “Hamilton” leather tote for $348, and a “Bedford” satchel in “MK” logo monogram at $328. Accessories have the major advantage of being free of sartorial constraints, he said.

“They have no size, no age,” Kors said. “You could feel you are having a fat day, you can still wear accessories.”

The same year Kors rolled out his second line, he joined the reality show “Project Runway” as a judge alongside model Heidi Klum. His sometimes acerbic commentary on contestants’ designs -- “She looks like she got caught in a tornado of toilet paper” -- introduced his brand to millions of viewers. At the time, 11 percent of Americans knew the Kors name. Now 71 percent do, according to the company.

Lauren Connection

Kors is led by Chief Executive Officer John Idol, who previously ran Donna Karan International Inc. and worked at Ralph Lauren. Shareholders Laurence Stroll and Silas Chou, who head the private-equity firm Sportswear Holdings and helped develop the Tommy Hilfiger brand, sit on the board.

Until the company went public in December, few knew how well it was performing. Turns out revenue soared 68 percent in its fiscal third quarter ended Dec. 31, while Coach, operating off a much bigger and older store base, saw a 15 percent expansion in the same three months.

Michael Kors’s revenue -- which analysts peg at $1.3 billion in fiscal 2012 ending in March -- may surpass $4 billion in less than 10 years, said Erika Maschmeyer, an analyst with Robert W. Baird & Co. in Chicago. Per-share profit will rise 30 percent in 2013 while Coach’s will improve 18 percent, said Brian Tunick, a New York-based analyst with JPMorgan Chase & Co.

CEO Idol, 53, is targeting 35-year-old members of the global jet set and those who aspire to that lifestyle. The stores play louder, hipper music than Coach and employ a more diverse staff, said Paul Lejuez, a Nomura Securities International Inc. analyst in New York.

Price Points

Coach takes a “portfolio” approach to its product line, using customer research to help it target different price points and fashion tastes, said SageBerry’s Dennis, a former senior vice president of Neiman Marcus Group Inc. Coach said its customers are college graduates ages 25 and older.

The two brands, though, are “sitting on top of each other more and more,” because Michael Kors is moving down the fashion ladder to become increasingly accessible while Coach is trying the harder task of climbing it, Dennis said.

Coach is no pushover. It has dominated the U.S. luxury handbag market for more than a decade and powered through the recession. Coach’s North American handbag and accessories sales grew 15 percent in the past 12 months, beating segment growth by five percentage points. Chief Executive Officer Lew Frankfort is expanding the Chinese and men’s businesses.

What’s more, because Kors is more fashion-oriented than Coach, the upstart may be prone to profit-eroding fashion “misses,” according to Barbara Wyckoff, an analyst at Credit Agricole Securities USA in New York, who warns that Michael Kors’s extraordinary growth is unsustainable.

When Wyckoff bought a silver-studded Kors bag, she loved it at first. Then she got bored.

“Coach is going to be hard to catch,” she said.

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