Why Michael Kors is Leaving Coach Behind

NEW YORK ( TheStreet) - Consumers may not be in the mood to shop for fashion-specific items these days. However, their desire for things like accessories and handbags is still benefiting Michael Kors ( KOR), leaving its largest competitor, Coach ( COH), in the dust.

As customers continue to flock to Michael Kors, its largest competitor, Coach, is feeling the pain.

The New York-based company is in the middle of a strategy transition to sell more than handbags and purses by expanding its shoes, watches and men's categories, for instance. However, customers, particularly in the U.S., have yet to be receptive.

Coach said last month that its first-quarter profit slipped 1.3% to $218 million, or 77 cents a share, compared with $221 million, or 77 cents a share, in the year-earlier quarter. Wall Street was expecting the company to earn 76 cents. Net sales also fell to $1.15 billion in the September-ending quarter, below analysts' expectations of $1.19 billion.

"The consumer has stepped away from Coach in favor of Michael Kors, Fifth & Pacific's ( FNP) Kate Spade, Tory Burch, etc.," retail consultant Jan Rogers Kniffen told TheStreet last month, following Coach's earnings.

Michael Kors said Tuesday that second-quarter net income rose 49% to $145.8 million, or 71 cents a share, beating the average analyst estimate by 3 cents.

Total revenue at the Hong Kong-based lifestyle retailer also jumped 39% to $740.3 million over the year-earlier quarter. Analysts, according to Thomson Reuters, expected the company to report revenue of $726 million.

Retail net sales increased 47% to $355.6 million driven by a combination of strong same store sales as well as new stores opened. Michael Kors said comparable store sales rose 23% compared to the year-earlier period. The company also opened 83 new stores last quarter. In addition, wholesale net sales jumped 30% $351.9 million and licensing revenue increased 66% to $32.9 million.

"Our strong financial results in the second quarter underscore Michael Kors' expanding brand awareness and global presence," Chairman and CEO John D. Idol said in the earnings statement. "Comparable stores sales increased 23%, representing our 30th consecutive quarter of growth. The outstanding revenue performance was driven by strong acceptance of the fashion luxury products created by Michael Kors and our design teams, as well as the exceptional jet-set in-store experience that we offer to customers in our retail stores and in-store shops. Overall, we continue to see great demand for Michael Kors as a global luxury lifestyle brand. "

The strong comps should drive Michael Kors' stock upward today given that it "indicates the accessory sector growth remains exceptional," Citigroup analyst Oliver Chen wrote in a note on Tuesday.

Michael Kors shares were rising 3.3% to $77.23 before the markets opened on Tuesday.

At quarter's end, Michael Kors had 477 stores worldwide, split between 352 company operated retail stores, including concessions, and 125 additional retail stores operated through licensing partners.

Michael Kors' gross profit as a percentage of total revenue rose to 60.8% compared to 59.3% last quarter.

Sales in North America specifically rose 31% and comparable store sales increased 21%, driven by strength across accessories and watch offerings as well as "strong consumer response to our jet-set in-store experience," Idol said.

In Europe, sales more than doubled in the second quarter, as brand awareness continued to drive comparable store sales growth of 45%, Idol said.

For the third quarter of fiscal 2014, the company expects total revenue to be in the range of $845 million to $855 million and earnings between 83 cents and 85 cents a share. Wall Street is looking for revenue of $841 million on earnings of 85 cents a share, according to Thomson Reuters.

For fiscal 2014, Michael Kors now expects total revenue to be in the range of $2.9 billion to $3 billion and earnings in the range of $2.77 a share to $2.81 a share. Consensus estimates call for full-year revenue of $2.9 billion on earnings of $2.77 a share.

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

More from Stocks

Amazon Shares Near All-Time High on Huge Quarterly Earnings Beat

Amazon Shares Near All-Time High on Huge Quarterly Earnings Beat

Barbie Flexes Her Muscle in Mattel's Q1 Earnings

Barbie Flexes Her Muscle in Mattel's Q1 Earnings

Coke's a Better Stock Buy Than Pepsi on North America Sales
Amazon Crushes First-Quarter Profit Estimates -- Watch TheStreet's Live Analysis

Amazon Crushes First-Quarter Profit Estimates -- Watch TheStreet's Live Analysis

Dow Jumps 238 Points as S&P 500, Nasdaq Also Climb

Dow Jumps 238 Points as S&P 500, Nasdaq Also Climb