The handbag woes just keep building.

Several Wall Street firms concluded Monday that the slowdown in the handbag sector still hasn’t abated, and that isn’t expected to bode well for earnings reports slated to come out this week. First up will be Coach Inc. on Tuesday, followed by Kate Spade & Co. on Wednesday and Michael Kors Holdings Ltd. on Thursday.

With one corresponding downgrade by Matthew Boss at J.P. Morgan on Coach, and a lowering of estimates for Kors by Erinn Murphy at Piper Jaffray, shares of those firms both fell in trading Monday. Coach slipped 2.5 percent to close at $30.43, while Kors slumped 7.8 percent to $28.71.

The slip in share price was the only common denominator between the two companies. Kors was the top brand in one channel check, while Coach was preferred in another survey.

Cowen & Co. analyst Oliver Chen said his channel check with Sahler Research, across 40 states with 82 participants, showed that Kors remains the sector’s top brand, although momentum for Kors, Coach and Kate Spade were seen to be reflecting slowing trends in June versus April and May. Chen cited lack of newness as one possible reason. Another was the restocking by consumers in the apparel and ath-leisure categories. Last week, there were rumblings of a leveraged buyout, which sent shares rallying to as high as $42.26. On Monday, Chen said a buyout could happen given the current valuation; substantial free cash flow; strong brand equity and a conducive financing environment. Monday’s sell-off gave back some of those gains from Wednesday.

Chen suggested that a leveraged buyout of Kors is possible — which would come only four years after the firm went public. That

Murphy downgraded Kors to “neutral” in April, and on Monday lowered estimates to $38 a share from $44. “Our checks suggest inventory for Michael Kors is building at retailers like Macy’s and Dillard’s [while] watches remain under pressure in the U.S. and are starting to slow in Europe.” Estimates were reduced due to a perception of what will be a “period of sustained negative comps,” the analyst said.

The channel check by J.P. Morgan’s Boss, which polled 500 women between ages 22 to 55 who have purchased a handbag within the past 12 months, suggested a lack of customer awareness of product changes made at Coach over the past 12 months. Boss said price remained a primary motivation for purchase, rather than brand. Specifically, Coach at 21 percent is the brand of choice versus Kors at 12 percent, while — for bags in the $300 to $500 price range — 74 percent of respondents said the bags are “overpriced” today. Only 12 percent of higher-income respondents observed positive change regarding product and styling at Coach. About 72 percent saw the line as unchanged, even though designer Stuart Vevers’ assortments have been in the stores for nearly a year now.

For watches, 89 percent said they do not yet have a smartwatch, and only 21 percent said they are inclined to buy one. Boss downgraded Coach to “neutral.”

In comparison with its competitors, Kate Spade & Co. saw shares rise 0.7 percent on Monday to close at $20.25, although shares of all three were close to their 52-week lows.

According to Simeon A. Siegel of Nomura Securities International Inc., “Kate has never said its handbags were not doing well.” He noted that while there’s a bit of a deceleration in comps for Kate Spade’s handbags, women are still buying them and the company is still comping very high. His forecast is for an 8 percent comps gain. Siegel said it was hard to figure out at this point in time whether the handbag market has slowed because the large players have seen a slowdown or because women really don’t want as many handbags.

Siegel also noted in the case of Kors, some feel that there’s “been this amazing watch cycle, when it really has been an amazing Kors cycle. Growth in watches was very much driven by Kors and its contribution to the overall watch cycle.”

Siegel has expected there to be some level of saturation for both watches and handbags. “Michael Kors is still selling an amazing amount of goods. With regular discounting, the margin levels will come down. The old margin levels were unsustainable,” Nomura’s analyst said.

In fact, Kors chief executive officer John Idol has been warning since the firm’s initial public offering in December 2011 that at some point, the margin levels will normalize.

While Siegel acknowledged that “it’s clear investor appetite for handbags has all but dissipated,” he has a “buy” rating on shares of Kors, noting that at current valuation levels, any good news will cause the stock to go up.

load comments
blog comments powered by Disqus