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Undoubtedly, one of the toughest sectors to own over the last year has been fashion accessories.
I’m talking watches and purses. Despite the strengthening economy and rising employment, it hasn’t been a fruitful market for these discretionary products.
Watch-wise, both Movado Group (NYSE: MOV) and Fossil Group (NASDAQ: FOSL) are taking heat from Apple Inc.’s (NASDAQ: AAPL) Apple Watch rollout. Both Movado and Fossil are down 30% over the last year.
No one expected Apple’s iPhone to crush Blackberry (NASDAQ: BBRY), but it did. What will ultimately happen with the Apple Watch remains to be seen. However, Movado and Fossil are working against a very powerful force.
But it’s not just watches. The major purse players are also taking a beating. Kate Spade (NYSE: KATE) and Michael Kors (NYSE: KORS) are both off over 35% year-to-date.
You can throw Vera Bradley (NASDAQ: VRA) in there too. Even with its unique style, shares of Vera Bradley have been cut in half over the last 12 months.
Coach (NYSE: COH) is the only one holding up, but it has still been a disappointment over the long term. It’s down 17% over the last five years.
Bargain Shopping
With all that said, everything is a buy at a certain price.
However, Kors might be going through what Coach did a few years ago, when growth started slowing. Comparable-store sales at Kors turned negative last quarter, the first time this has happened since the company went public. If this is Kors’ Coach moment, investors are in for more pain.
Yet, the beauty of Coach is that it has a large installed base of stores and distribution networks. In Japan, Coach has managed to enjoy low single-digit growth over the last decade. Meanwhile, many other accessories companies have seen declining growth in the Japanese market.
Despite the rough last few years, Coach still has a lot of growth potential in China. In North America, it’s all about building products that resonate with customers and reducing its brand-diluting activities, like flash sales and deep discounted outlet pricing.
Don’t Hate on Kate
The other interesting play in the fashion accessories space is Kate Spade. It’s been a tough go of it for the accessories maker so far this year, but it did announce a strategic realignment in early 2015. Meaning, 2015 could be a “transition” year as it works out some near-term issues.
The company installed a new CEO in 2014 and has been working on repositioning its core Kate Spade brand, while discontinuing its casual brand. It’s also looking to tap into the male market with the Jack Spade brand.
At the current juncture in the fashion accessories industry, it’s about free cash flow and balance sheet strength. None of the major accessories companies are burdened with high debt loads, and most have no debt at all.
Coach has more cash that it has debt and Kate Spade carries no debt. In terms of cash flow, Coach still reigns supreme. It’s generating enough free cash flow on an annual base to cover 8% of its market cap, compared to less than 5% for Kors.
And let us not forget about Coach’s impressive 3.9% dividend yield. It’s upped its dividend for six straight years now.
The beauty of Kate Spade is that it’s one of the cheapest stocks in the fashion accessories industry, with a forward price-earnings ratio of less than 11, based on next year’s earnings estimates. And while it doesn’t pay a dividend, Kate Spade has been aggressive at buying back shares. It’s bought up enough shares over the last 12 months to cover 8% of its market cap – more than Kors or the aforementioned watchmakers.
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