Stephens' Channel Checks Show Coach On Pace To Beat Q1, Michael Kors Promos Flat

Channels checks were most favorable for Coach Inc (NYSE: COH), while suggesting that Michael Kors Holdings Ltd (NYSE: KORS) was unable to pullback on promos. Stephens' Rick Patel remained on the sidelines for both stocks, albeit for different reasons.

Coach

Analyst Rick Patel maintained an Equal-weight rating for the company, while raising the price target from $35 to $40. March checks indicate a sequential decline in discounting through 1Q in both the handbag and footwear categories.

“Based on our favorable channel checks, we expect Coach to beat Street estimates of a -1.3% comp in fiscal 3Q16 (calendar 1Q16). We are already above the Street with flat comps,” Patel wrote.

The analyst mentioned that Coach’s shares could surge in the near term, while saying that the company had made progress in improving its products, reducing promos, winning back customers, and growing Stuart Weitzman.

While Coach was making progress with its turnaround strategy, the shares are already trading at a premium valuation. “We await a pullback in shares before getting more constructive,” Patel commented.

Michael Kors

The analyst maintained an Equal-weight rating for the company, saying that channel checks had indicated flattish discounting in the handbag category in 1Q15 versus 4Q15.

“By month, handbag promotions increased sequentially throughout 1Q,” the Stephens report noted. In the footwear segment, promos declined sequentially in 1Q, while apparel promos increased.

“When Kors reported calendar 4Q15 results on Feb 2nd, it stated its intention to pull back on promos, which we haven’t seen meaningful evidence of yet. In our view, the lack of progress on promotions plus the fashion trend towards smaller handbags, is likely to pressure AUR,” Patel wrote.

Comps can be expected to remain in-line with the Street’s expectation of 0.9 percent y/y, given easy comps. “Similar to last quarter, the inclusion of e-commerce in comps should be a couple hundred basis points of help,” the analyst commented. He added, however, that “there is more work to be done if Kors wants to protect its brand longer term.”