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How To Find the Next Michael Kors

NEW YORK ( TheStreet) -- "One minute you're in, the next you're out," Heidi Klum says in Project Runway.

That's a fashion and retail concept many in the securities business just don't get. And investors would be wise to understand the fickle nature of the fashion world, where an upstart can topple a well-known brand in a matter of months.

That's why Coach (COH - Get Report) shareholders were caught by surprise with the drop in the company's stock and the rise of Michael Kors (KORS - Get Report). Simply put: Coach is out, Kors is in.

You can rattle off all the numbers you want about Coach -- I hear the same ones with Tiffany (TIF) too. Store expansion, China, new styles, etc. But it doesn't change the fact that Coach is out. It is no longer aspirational. Who doesn't own a Coach bag -- or two or three? Coach is for sale at outlet stores with inexpensive versions of its own quality product, which obviously cheapens the brand.

One thing about luxury goods is that the buyer perceives she is getting something special. Coach is no longer special. Kors, however, is. The handbags aren't priced like Gucci or Vuitton, so it is accessible, but consumers feel that buying a Kors bag is a step above Coach. That is why the stock of Kors is doing so well and Coach isn't. It has nothing to do with quality or the numbers -- it's fashion. The fact that Kors is now worth $12 billion and was one of the top 10 IPOs of 2012 has hungry investors shopping around for the next Michael Kors.

The next Kors is Tory -- Tory Burch. Tory Burch, for the uninitiated, is preppy. Burch grabbed women's attention with a ballet flat decorated with the signature "T" logo, and it went from there. The company is now worth over $3.3 billion. Founder Tory Burch's 28% stake is said to be worth $935 million. Ralph Lauren (RL) and Tommy Hilfiger (PVH - Get Report) are classic preppy, but neither have the feminine flair that has made Tory Burch so popular. The company hasn't filed for an IPO, but that is mostly because of a nasty divorce between Tory Burch and Christopher Burch that was resolved in 2012. Mr. Burch owned too much stock and had too much say, even though the couple was separated. Tory Burch is now free to move forward and the IPO market is salivating.
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