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Is the handbag industry decelerating? Kate Spade shines while Michael Kors losses luster

By Angela Gonzalez-Rodriguez

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Management |ANALYSIS

Michael Kors Holdings Ltd., Kate Spade & Co. and Coach Inc. all topped analysts’ earnings estimates for the past quarter after all of them cut costs and reduced discounts to boost ailing sales. However, a shadow pends on all of them as many wonder whether this once rapidly growing niche is now decelerating.

Once seen as symbol of status, highly-priced handbags are now falling out of fashion. Furthermore, according to a recent study conducted by Goldman Sachs and Teen Vogue, most brands that design accessible luxury handbags are "falling flat," and becoming less and less appealing to so-called "it girls."

As FashionUnited highlighted, the main player to date within the affordable luxury handbags, American brand Coach, has been recently deemed way too expensive for the quality it offers.

Analysts expect more women to spend less on designer handbags

In short, and as put by Goldman Sachs, these ratings are a "predictive tool," meaning we can expect more women to spend less money on designer handbags going forward.

Growth of the once-hot segment in North America has slowed to low single digits, Kors Chief Executive Officer John Idol said last week on an earnings conference call. Young customers are still buying handbags and leather goods, but styles have shifted to lower-priced large wallets and small cross-body bags.

“There’s been this myth that no one is buying handbags anymore, but really it’s a change in trend away from the big totes everyone was buying a few years ago to smaller bags that don’t cost as much,” said Dorothy Lakner, a New York-based analyst at Topeka Capital Markets, reported Bloomberg.

The worse hit brands include the likes of Longchamp, Coach, Tory Burch, and Michael Kors, which iconic brands are losing luster. According to the report, their "affinity" ratings dropped from last year, meaning that smaller percentages of fashion-forward girls are compelled to shell out for their fashions.

Coach and Michael Kors, those to be concerned the most

"Coach is a classic example of a company that became a victim of its own success," wrote Håkon Helgesen, a retail analyst at equity research firm Conlumino. "Its products became ubiquitous — something that sits uncomfortably with the concept of luxury, where a degree of exclusivity needs to be maintained."

In other words, as brands become ubiquitous, their exclusivity appeal decreases as Michael Kors well know.

Proof of it is that even if Michael Kors posted better-than-expected earnings results earlier in November, as retail analyst and Telsey Advisory Group CEO Dana Telsey highlighted, it is important to go beyond the raw figures.

"I think, overall, when I look at the name, I think yes, you had a sequentially improved comp, earnings came in better than expected, but look under the hood," she told CNBC's "Fast Money: Halftime Report" in a recent interview.

Kate Spade, the light at the end of the tunnel for the designer handbags niche

On the upside, Telsey added that even if the handbag industry is decelerating off a larger base, Kate Spade might still be a good buy.

"I think the difference between KATE and KORS, it's a smaller business, it's off a smaller base, it has a more extensive product offering," she said. "It doesn't have as much exposure to the department stores as what both Coach and Kors have, and their comps are running positive because it is such a smaller base."

Actually, Kate Spade’s handbag sales make up circa 70 percent of its revenue, according to data compiled by Bloomberg.

"It’s going to take a lot to dispel the concerns," concluded in a market report Simeon Siegel, an analyst at Nomura Securities.

Coach
Kate Spade
Michael Kors