Are Handbags Ready For A Comeback?

As Coach Inc. preps for its Q1 earnings release Tuesday, insiders are buzzing about whether the company, known for its designer monogram and leather handbag offerings, will reinvigorate excitement in the sector.

After enjoying years of booming sales, handbag power players, including Coach and Michael Kors Holdings Ltd., have been plagued by softening product demand. The declines trickled into the first half of 2015 and while there has been some hope —enlivened by Kate Spade & Co. and Gucci’s resurgence in Q2 — many market watchers remain sidelined.

Cowen and Co. analyst Oliver Chen, in an Oct. 26 note, said he continues to be cautious on handbag stocks. His checks in 30 states with 65 participants supports his prudent view on the category, Chen said.

We have incremental concerns on the overall space as department store sales trends for Michael Kors decelerated to low-single digits year-on-year for July to September versus [an increase of] mid-single-digits year-over-year in April through June,” Chen said.

The analyst also noted that Coach trends are “still soft, but stable” at low-single digits year-over-year.

“Comments from survey respondents reveal new styles at Coach resonating with customers, as the brand’s revamped modern luxury positioning appears to be creating additional interest in Coach,” Chen wrote. “We’re also pleased to see our survey results indicating inventories and markdowns of Coach handbags largely under control at U.S. dept. stores.”

Chen continues to see potential in Kate Spade and has named the brand his top choice in the space.

Despite our tepid outlook on the overall handbag space, we still like Kate and reiterate ‘outperform,’ as we feel the brand is best prepared to weather a tough sector backdrop on elastic category expansion, conservative promo posture, and management’s diligence in controlling distribution,” Chen said.

The market watcher downgraded Michael Kors stock Monday — acknowledging that Kors’ momentum is “sequentially improving during the quarter,” however expressing uncertainty about the sustainability of the trend.

“Looking ahead, we expect the handbag category will likely continue to face pressure with secular shift into smartphones/wearable tech from accessories, plus the rise of athleisure and denim trends,” Chen wrote.

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