Coach (NYSE:COH) reported second quarter earnings Jan. 23 prior to the market opening for trading. Delivering its most anemic sales growth figures since 2008, investors took its stock out to the woodshed, knocking it for a 16% decline on the day and within 6% of its 52-week low. Speculation is that the bag maker is losing market share to Michael Kors (NYSE:KORS). Is Coach's loss Michael Kors' gain?

SEE: Industry Handbook: The Retailing Industry

The Bad News
North America didn't pull its weight in the quarter with same-store sales down 2%, its first quarterly decline since 2009. According to Brian Sozzi, chief equities analyst for NBG Productions, "Kors seems to have more floor space in the department store, and people were gravitating toward the brand this holiday season."

To put the difference in the growth both companies are experiencing into context, let's look back at their respective second-quarter reports in early 2012. Coach saw its North American comps increase 8.8% year over year, which indicates this year's second quarter report was a step backwards of almost 11 percentage points. As for Michael Kors, it will announce its third quarter results in the middle of February.

Given its North American comps for the third quarter 2011 increased by 38%, it's going to be really tough for it to match those numbers, especially since a number of higher-end businesses such as Tiffany & Co. (NYSE:TIF) and Coach have already announced mediocre holiday results. In mid-November, Kors provided third quarter guidance that included a 25% increase in same-store sales, give or take 100 basis points (BPS). That's not 38%, but then again it's much better than a 2% decline for Coach. Clearly, its North American business is going through a rough patch.

SEE: Analyzing Retail Stocks

The Good News
Internationally, its business is in much better shape. Sales increased 12% in the second quarter to $411 million, with China delivering an increase of 40% in total revenue, same-store sales growth in the double digits, and projected to generate $400 million in revenue in fiscal 2013. Coach now has 117 stores open in mainland China, which, although significant, is still far less than the 193 locations open in Japan. CEO Lewis Frankfort, one of the best in the business, is confident it can continue to grow in places such as Asia while it works out the kinks in its home market. In fiscal 2012, 32% of its revenue was outside the United States. It wouldn't be a stretch to suggest that number will be 50% or higher within five years. Were this to come to pass, its business would actually be stronger because of the geographic diversification.

Two other pieces of news bode well for the company: First, its men's business is expected to contribute $600 million in fiscal 2013, a 50% increase over 2012. In 2012, its men's business accounted for 8.4% of its overall revenue. In 2013, Frankfort expects $600 million in revenue from the men's business, an improvement of 300 BPS in its contribution to the company. While I doubt the men's business will ever amount to more than a sliver of Coach's revenue, it does help to have a few growth drivers available when setbacks such as the North American business come to light. The second interesting development is the relaunch of Coach footwear in roughly 170 of its North American stores. Because women tend to buy shoes more often than handbags, Coach hopes its presence of footwear will drive increased traffic to its stores. Furthermore, by becoming a lifestyle business, as opposed to just a handbag company, it becomes less affected by changing trends. Although some critics contend its diversification efforts simply make it like any other high-end retailer, the reality is that women can only use so many handbags; by providing a head-to-toe product range, women will become far more emotionally attached to the brand. In the long term I see this as an excellent move.

SEE: Earnings Forecasts: A Primer

The Bottom Line
I began this article wondering if Michael Kors was taking market share from Coach. In North America there's no question that Coach is losing customers to its upstart rival. While Coach's first-quarter revenues in North America grew 9% year-over-year ending Sept. 29, 2012, Michael Kors grew 60%. Coach's muted growth in both its first and second quarters when compared to Michael Kors is ample evidence that it's losing the fight. Overseas, the evidence is less compelling. Coach's international business is gaining ground as its North American business slows. They are about six times as great as Michael Kors' but still growing by double digits each quarter.

Any further weakness in its business provides investors with an opportunity to buy its shares below $50 for the first time since August 2011 and September 2010 before that. Coach will get its North American business in shape over the next year, and when it does you won't be able to buy its stock below $50 as you can now. Take advantage of this weakness and buy, buy, buy!

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

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