It's no secret that Michael Kors' (NYSE: KORS ) success in North America has negatively affected Coach (NYSE: COH ) . In fact, earlier this year, Coach even admitted that Michael Kors was a direct cause of its poor performance, saying that it had lost market share to Michael Kors in the handbag space. However, as many anticipate and hope for a Coach turnaround, and place their bets on strong international growth, there is one initiative from Michael Kors that should be terrifying for Coach investors.
Its been ugly for Coach
Coach and Michael Kors are both luxury designers with a large North American presence. At the end of Coach's fiscal 2013 report, Coach as a company was more than twice the size of Michael Kors by revenue. However, as of both company's most recent quarters, the gap had closed, and these are two companies of near similar size by sales.
Michael Kors' performance can be traced to consistent revenue growth in excess of 50% annually. Meanwhile, Coach's struggles can be traced to North America, a region where comparable sales have fallen by double digits throughout most of the last year. There is a direct correlation between the success of Michael Kors, and the struggles of Coach.
Coach combats Kors with international growth
During Coach's last fiscal year its revenue fell 5.3%, a far contrast from the 6.6% growth in the year prior. Perhaps the only bright spot for Coach has been international performance, a segment that saw growth of 5.5% during the company's last year.
Specifically, 34% of Coach's annual revenue comes from 35 countries outside North America, mainly China, Japan, and countries in Europe, but the company is also expanding aggressively in other regions throughout Asia and South America.
According to Coach's annual report, it has historically expanded internationally by forming joint ventures or distributor relationships to build market presence, and then by acquiring its partner's interest. It did this with Sumitomo Corporation in 2005 to form Coach Japan; Hackett Limited to expand its European operations; and also to enter Hong Kong, Singapore, and South Korea; and to form Coach China, among others. Notably, Coach continues this strategy today, and noted in its 10-K plans to expand in China, Japan, and Europe in the coming years.
What's so terrifying?
With all things considered, Coach has clearly taken to international markets to combat Michael Kors' growing dominance in North America. But the problem is, Michael Kors is becoming a major problem for Coach in international markets as well. Specifically, Coach's international growth last year of 5.5% was cut in half from the year prior, perhaps because Michael Kors is becoming relevant in many of Coach's key international markets.
Michael Kors reported $106.6 million during its last quarter in international sales, coming from Europe and Japan; Coach created more than $1.64 billion in international sales last year. Importantly, Michael Kors' comparable sales growth during its last quarter in Europe and Japan were 54.2% and 48.8%, respectively, growth that has been consistent for the better part of 12 months. While Coach does not disclose revenue by specific regions outside of North America, the company has named Europe, Japan, and China as key developed international markets for the company. Therefore, given what Michael Kors has done to Coach in North America, its success in Europe and Japan should be terrifying for Coach investors.
Michael Kors' international business is much smaller and nowhere near as developed as Coach's, but investors must take notice that Coach's international sales growth did slow last year despite rapid expansion, and like North America, Michael Kors' growth was explosive.
Furthermore, Michael Kors already said in its 10-K that expanding in Europe and Japan remains a key goal looking ahead, and while the company is yet to make its presence felt in China, it should be noted that more than 40% of its goods are manufactured in China. Hence, Michael Kors has a presence, or partnerships, and if it chooses to follow the same expansion path of Coach, acquiring the controlling interest in these Chinese businesses, Michael Kors could likely gain a quick boost in China.
Thus, Michael Kors' continued expansion and growth in Coach's key international markets should be terrifying for investors in the latter. When combined with the likelihood of Michael Kors entering China, Coach's investment value becomes decimated.
Before investing in Coach, investors must consider that the company's only bright spots come outside the U.S., markets where Michael Kors is expanding rapidly.
In retrospect, if Michael Kors decides to enter China -- along with South America and continued European expansion -- Coach's international growth could ultimately decline, or perform similarly to its poor performance in North America. While speculative, Michael Kors' comparable sales growth in Europe and Japan serve as proof that its brand has global appeal, far beyond North America. For Coach investors, this fact is not only disheartening, but scary as Michael Kors enters these markets, and considers it a top priority in the years ahead.
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