Luxury Handbag Pair Trade: Jefferies Likes Coach, Downgrades Vera Bradley

A new Jefferies report focuses on a specific retail segment that has been under a lot of pressure in recent years: handbags. Jefferies analyst Randal Konik believes that the results from a new handbag survey indicate that the worst of the downturn in the handbag market could now be in the rear-view mirror.

Interesting Correlation

Konik notes that Jefferies has identified a strong negative correlation (correlation coefficient -0.71) between handbag sales growth and footwear sales growth. While footwear has been on fire in recent years, handbag sales have slipped. Konik believes that the wave of new handback styles will shift the balance of discretionary spending back in favor of the handbag industry once the new styles begin to gain traction.

Underappreciated Turnaround

According to Konik, the stock market is not recognizing the early indications from Coach Inc COH that the company’s turnaround efforts are beginning to pay off. Survey results show that Coach has begun to attract new customers at a faster rate than its churn rate of legacy customers. “Plus, we expect COH’s remodel initiative to help fuel the return to positive comps, driving cost leverage & margin re-expansion,” Konik adds.

In the report, Jefferies upgrades Coach from Hold to Buy and sets a $50 target price for the stock.

Other Names

In addition to Coach, Konik is also bullish on Michael Kors Holdings Ltd KORS. “According to respondents, Kors continues to have strong brand relevance & clear loyalty among previous customers,” Konik explains. Jefferies reiterates its Buy rating on Kors and $90 price target for the stock.

Jefferies is not quite so bullish on Vera Bradley Inc VRA and downgraded the stock from Buy to Hold based on year-over-year declines in favorability among survey respondents. Jefferies lowered its price target for the stock from $18 to $11.