Handbag Wars! Kate Spade And Coach Seek To Capitalize On Michael Kors' Retreat

Michael Kors Holdings Ltd KORS's loss could be Kate Spade & Co KATE and Coach Inc COH's gain, at least according to BMO Capital Markets' John Morris.

In a report on Wednesday, Morris noted Michael Kors' management team has been focusing on reducing its glut of wholesale inventory over the past few quarters as it's looking to "retreat" from the category. Meanwhile, the company hasn't yet become reliant on promotions to get rid of inventory and may do so over the coming quarters.

The problem is even if Michael Kors becomes reliant on promotions to rid the channel, it will result in multiple quarters of poor sales and also poses the risk of becoming impatient and making mistakes. Meanwhile, Kate Spade is looking at Michael Kors' retreat and "stuffing" the wholesale channel and ramping up promotions but Coach is showing some restraint.

Is Michael Kors Loss Kate Spade And Coach's Gain?

Morris argued that Michael Kors is facing a "tumultuous" period as it's trying to convince consumers that it's not an off-price brand and should command a full price. The problem is that consumers these days have shown an "addiction" to off-price brands and retailers.

As such, the analyst believes there is short-term risk to Michael Kors but investors shouldn't necessarily be rushing to buy shares of Kate Spade.

Kate Spade's stock surged after the company confirmed it's exploring strategic alternatives, including a sale of itself. The analyst believes the stock is already trading near an expected deal value, which limits further upside in shares.

On the other hand, Coach boasts a more attractive longer-term fundamental and the stock could even get a boost in sympathy if any deal is finalized to acquire Kate Spade.

Related Link:

Gadfly's Banjo: Kate Spade Shouldn't Sell Itself

Michael Kors, Coach Potential Suitors In Kate Spade Buyout