Barclays Highlights 'Upside For Some' In Handbag Group, Considers Coach, Kate Spade, Michael Kors

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In a report published Monday, Barclays analyst Joan Payson commented on the U.S. Luxury, Apparel & Footwear space with a focus on handbags.

According to Payson, some of the slowdown in the space could be related to near-term disruption around tourism (due to unfavorable exchange rates) and is "more pronounced" in the department store channel, which some brands have less exposure to than others. As such, there has already been a "productivity correction" among some of the top domestic names.

Coach: Remain Confident In Long-Term Positioning

According to Payson, Coach Inc COH is positioning itself for long-term growth. The company's remodeling of 70 stores in North America is so far generating "strong" positive comps, which is expected to continue moving forward, potentially resulting in breakeven comps in fiscal 2016.

In addition, Coach's strategy of being less promotional provides the company with a way to offset gross margin "degradation" from the increased mix towards cost elevated products.

Finally, Coach is likely to see continued "muted" results in China but could be offset by a rebound in Japan and new opportunities in Europe.

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Shares remain Overweight rated with an unchanged $50 price target.

Kate Spade: Expect Upside From Current Levels

According to Payson, North American trends will continue to pressure Kate Spade & Co KATE, especially tourist related sales in key regions, which represent nearly 30 percent of its domestic store base.

However, Payson sees Japan sales offsetting tourist related sales declines in the U.S. as retail data points in Japan point towards "strong" department store and accessory performances. In addition, Google trend data suggests that search activity for the Kate Spade brand is still showing "heightened activity" with search results up 8 percent throughout the second quarter, outpacing double-digit declines at some competitors.

Finally, Kate Spade's expansion into new categories across women's, kids, home categories and fitness apparel demonstrates management's commitment to "escalating" its offerings.

Shares remain Overweight rated with an unchanged $41 price target.

Michael Kors: Trends To Remain ‘Challenged'

Finally, Payson noted that Michael Kors Holdings Ltd KORS is expected to continue seeing its comp trends remaining "challenged" due to its over-exposure to the already "pressured" tourist groups. At the same time, the company's industry leading domestic productivity level of over $1,900 per square foot may have reached peak productivity and will likely decline.

Payson also pointed out that Macy's, Inc. M's comp declines within its handbag category last quarter suggests there was "meaningful" price competition between Kors' wholesale and retail channels, indicating the company is "having a tough time" as consumers are increasingly moving toward wholesale channels.

Finally, new initiatives surrounding new store growth, the development of its men's business, and continued investments in its distribution infrastructure is hurting the company's overall operating margins.

Shares remain Equal-Weight rated with an unchanged $50 price target.

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Posted In: Analyst ColorLong IdeasAnalyst RatingsTrading IdeasApparelBarclayshandbagsJoan Payson
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