Why Handbag Retailers Could Face ‘Challenging’ Earnings

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In a report published Monday, Wedbush analyst Morry Brown commented that 2Q was marked by elevated promotions at handbag department stores, against an aggressive pricing environment. The specialty retail stocks seem to be “fighting uphill against negative sentiment.”

Analyst Morry Brown said that the promotional environment for handbags in the mid-tier channel had ramped throughout 2Q. “The market seems well aware of the category challenges,” Brown wrote, while adding that the shares of Coach Inc
COH
, Kate Spade & Co
KATE
and Michael Kors Holdings Ltd
KORS
had plummeted 17 percent, 41 percent and 36 percent, respectively, since May 1, as compared to the S&P 500 remaining flat, with “sentiment turning deeply negative across all three names.”

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Brown maintained a Neutral rating on Coach, with a price target of $37. The EPS estimate for 4Q15 has been reduce from $0.29 to $0.27 to reflect “sluggish sales within the handbag category and soft traffic at Coach retail stores.” This compares with the Estimize Consensus of $0.28. The EPS estimate for FY16 has been reduced from $1.88 to $1.84, versus the consensus expectation of $1.93.

“Consensus expectations embed a sequentially improved two-year stack comp (a metric that has slowed in seven of the last eight quarters), which seems unlikely given softness in the overall handbag category,” the Wedbush report stated.

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Brown maintained an Outperform rating on Kate Spade, with a price target of $32. “Our 2Q15 EPS estimate of $0.12 stands a penny above consensus, entirely based on confidence in gross margin deliverability, as the company laps 240 bps of inventory liquidation at Kate Spade Saturday last year,” the analyst mentioned. This is in-line with the Estimize Consensus for 2Q of $0.12.

While the momentum of promotions was mixed during the quarter, checks indicated “solid sell through and no signs of troubling clearance inventory levels,” Brown said. The shares already reflected that Kate Spade would miss the consensus estimate of 8 percent growth in same-store sales.

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Wedbush maintained a Neutral rating on Michael Kors, with a price target of $45. “Our store checks throughout the quarter indicated higher discounting and clearance inventory at retail locations, with depth and breadth of markdowns trending up YOY in 8 of the 13 weeks,” Brown wrote. The Estimize Consensus estimate stands at $0.78.

The analyst believes that the company’s FY16 guidance needs to be reduced from the $4.40-$4.50 range, although the market already seemed to be expecting this, “as sentiment on KORS is among the most bearish of any retailer within our coverage,” Brown added.

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