Michael Kors and Coach

Comprehensive Case Analysis

Payam Darian, David Frankel, Wilson Guo, Ping Ning,

Michael Schwartzberg, Yaron Talmor, Kevin Zobre
History - Michael Kors
- Michael Kors Holdings Limited was started by Michael Kors
in May 1981
- Michael Kors is currently the company’s chief designer
- Started as a high-end luxury brand
- First sold at Bergdorf Goodman and Saks Fifth Avenue
- Company Filed for Bankruptcy in 1990, but it rebounded
- Michael Kors later created several new fashion lines
- MICHAEL Michael Kors - Accessible Luxury Fashion
Line
- First retail store in 2006
- IPO in 2011
- Michael Kors was featured in Time Magazine’s 100 most
influential people in the world
History - Michael Kors (Continued)
- Currently Sells:
- Accessories, Footwear, Watches, Jewelry, Men’s and Women’s ready-to-wear,
eyewear, and a full line of fragrance products.
- Two Primary Collections:
- Michael Kors Luxury Collection
- MICHAEL Michael Kors Accessible Luxury Collection
- Three Business Segments:
- Retail - 48.8% of its total revenues
- Wholesale - 47.3% of total revenues
- Licensing - 3.9% of total revenues
 History - Coach
- Founded in 1941 in Manhattan as a family-run
business
- Originally crafted leather belts and wallets
- Coach’s popularity grew because of the quality of its
leather products
- Because Coach had excellent leather artisans, the
company decided to create leather bags, which
began very popular
- Coach hired designers for the new leather bags
- Coach grew tremendously and was eventually
bought out by the Sarah Lee Corporation.
 History - Coach (Continued)
- Current CEO Lew Frankfort joins Coach as the vice-president of business
development
- Coach expanded its product line that were branded with the Coach name:
- Updated classics line
- Expanded distribution channels
- Opened new boutiques in major department stores
- Opened new stores throughout the United States
- In 1987, Coach opened a store on Madison Avenue.
- In 1988, Coach expanded internationally, opening boutiques in England
and Japan. Coach extended further internationally afterward.
- IPO in 2000
History - Coach (Continued)
- Coach’s product offerings include modern luxury accessories and lifestyle
collections.
- Two Segments:
- North America Segment - approximately 65% of total net sales
- International Segment - approximately 34% of total net sales
 Global Apparel Retail
Industry Overview
● Made up of Clothing, Textiles, Footwear, and Luxury goods
● Three General Markets:
○ Men’s wear
○ Women’s wear
○ Children’s wear
● Clothing- always will be an essential item
○ consumers will continually purchase clothing due to ever changing
fashion trends, marketing, and desire to signal social success
● Industry characterized by short product life cycles, vast product
differentiation, and fast demand
● Moderate risk level of investment
● Low barriers to entry and low requirements for capital
● high likelihood of competition in the industry
 Global Apparel Retail Industry Analysis
● 2010-2014 - Global Apparel Retail Industry Experienced
Moderate growth - Overall compound growth rate of
3.8%
● 2014- Total Revenues of $1.3 Trillion
● Women’s Wear Market- Most profitable with total
revenues of $650.7 Billion 49.4% of total industry
revenues
● Men’s Wear Market- $438 Billion 33.2% of total industry
revenues
Global Apparel Retail Industry Analysis
 Global Apparel Retail Industry
Forecast
● Global apparel retail industry is projected to
grow with an anticipated growth rate of 4.6%
from 2014-2019
● Projected Industry value of $1.7 Trillion by
end of 2019
● Expected to grow by 4.6% during years 2015
to 2017 and 4.7% during years 2018 to 2019
Global Apparel Retail Industry
Forecast
 Business Strategy Analysis &
Comparison- Michael Kors
● Michael Kors’s success attributed to unique marketing strategy
○ targeted a growing social class that other companies had not
thought to target
○ Established brand attractive to HENRY’s - Higher Earners not
Rich Yet (socio economic class that earns $100,000 to
$250,000) annually
○ HENRY’s - rapidly growing socio economic class while ultra
affluent is getting smaller
■ Have increased spending on luxury products since 2009
■ 21.3 Million Henry Households or nearly 10 Henry
household for every ultra affluent household
 Business Strategy Analysis &
Comparison- Michael Kors
● Rapid success may be at risk despite strategic marketing strategy
to capture business of HENRY’s.
● Overly Rapid expansion can erode brand value
● Continuation of lowering price and leveraging heavy discounts give
consumers the wrong perception and may affect its marketing
strategy as premium luxury brand.
 Business Strategy Analysis &
Comparison- Coach
● Business strategy different from Michael Kors due to having been
in existence for a lot longer time
● Considered a pioneer in the luxury industry and has established
major markets in North America, China, Japan, Europe unlike its
rivals such as Michael Kors
○ Established huge sales presence in 35 countries worldwide
through directly owned stores, wholesale agreement with other
retailers, department stores, and distributors
 Business Strategy Analysis &
Comparison- Coach
● Main Advantage over Michael Kors- Established brand presence in
China.
○ Coach ranked 22 out of 50 top most sought out luxury brands
○ China- Forecasted to be 2nd largest luxury market by 2019
○ Chinese Consumers- biggest consumers on luxury goods
worldwide
○ Coach to open up 20 more stores in China bringing total
number of stores to 175
 Business Strategy Analysis &
Comparison- Coach
● Despite established brand presence, Coach still losing its market share due to competition from
Michael Kors and Kate Spade.
● Coach undergoing a market strategy transformation
○ Executive changes made in management and design teams
○ Coach to push newer and pricier handbags
○ Ended the practice of too many flash sales from three per week to one per month
○ Expansion out of handbag and accessory market and move towards complete lifestyle
brand
○ Improve appearance of existing stores
○ Align inventory with customer demand requirements at retail stores and factory outlets
Industry Considerations
● Apparel market is growing and is expected
to keep growing
● Women’s wear is largest segment of apparel
retail industry (makes up 50.4%)
● Chinese economy slowing down
● Availability of manufacturing contractors
Porter’s Five Force Industry Analysis
● Nearly no barriers to entry→due
to availability of manufacturing
contractors
● High competition as a result
● Low supplier power, buyers
have power (many suppliers,
and no switching costs)
● Kors→ over-dependence on few
buyers [problematic]
● Threats of substitutes- prevalent
due to omnipresence in
counterfeit goods
Cross-Comparison of Strengths
Coach Michael Kors
● Coach dominates handbag ● Diversified portfolio of
market→ 55% of revenues products receive proportional
(women’s apparel accounts resources
for 50.4% of apparel market ● Brand equity through celebrity
value [2013]) promotion (viewed as high-
● Strong distribution network end luxury product)
(North America, Asia, and ● Uses strong brand presence to
Europe) strengthen licensing business
● E-commerce promotes brand [collaboration with Fossil for
throughout global markets watches]
Synergies/Opportunities
● What’s there to gain from a merger?
○ More market share- both spectrums
■ Coach’s competitive pricing strategy captures
consumers of lower-priced luxury goods and
■ MK’s pricing strategy captures market share of
higher-end luxury goods
○ MK’s diversified portfolio, well-established “high quality”
brand image, licensing network can be utilized by Coach
○ Coach’s distribution channels and e-commerce success
can help MK reach untapped markets/more global reach
Inherent threats
● As previously mentioned, substitute goods are very prevalent in this
industry
○ Counterfeit goods are inherent in the apparel-retail industry
○ Very difficult for MK or Coach to do anything about this
● No barriers to entry (e.g. availability of manufacturing contractors)
contributes to the intense competition (more of a problem for MK)
● Coach specific threat→ Chinese economy slowdown
○ Chinese consumers = largest # of luxury good buyers in the
world
○ Government put ban on advertisements of luxury goods
■ Adverse effect on Coach’s future revenues
Key Takeaways
● Merger benefits
○ Coach:
■ access to licensing rapport MK has built
■ access to MK’s creativity and diverse product development
■ capturing market share of higher-end luxury good consumers
○ MK
■ access to Coach’s vast distribution network
● solves MK’s limited distribution problem
■ access to Coach’s e-commerce customers in Asia
■ help MK expand their stores in Europe (aiming for a total of 600)
● Mutual benefit- both companies’ are adapting to market demand by
developing existing lines (e.g. Coach→ Footwear, MK→ Eyewear)
Financial Analysis
● Profit analysis
● Stock Performance Analysis
● Balance Sheet and Ratio
● Kors’ FY End is March 28th
● Coach’s FY End is June 28th
Profit Analysis - Kors
● Annual sale of $4.37 billion for fiscal year
ended March 28, 2015.
● 32% increase compared to FY 2014.
● Net Profit at $881 million,
● 33% increase compared to FY 2014.
● Profit Margin 20.15%, Operating Margin
28.77%
Profit Analysis - Kors
Profit Analysis - Kors
Profit Analysis - Coach
● Annual sale of $4.8 billion for fiscal year
ended June 28, 2014.
● 5.3% decrease compared to FY 2013.
● Net Profit at $781 million,
● 24% decrease compared to FY 2013.
● Profit Margin 10.78%, Operating Margin
18.86%
Profit Analysis - Coach
Profit Analysis - Coach
Sales: Kors Compared to Coach
Five Year Stock Performance: Coach, Kors
and Nasdaq
EPS: Kors Compared to Coach
EPS: Kors Compared to Coach
● Michael Kors’ earnings per share diluted
$4.28 per share for fiscal year 2015.
● Coach’s earnings per share diluted $1.93
per yesterday’s earning calls for fiscal year
ended June 28 2015, compared to $2.79 for
fiscal year 2014.
Dividend per Share Paid by Coach
● Michael Kors
never pays
dividend.
● Coach has been
consistently
paying dividends.
○ Risk of cash
shortages
 Management Effectiveness
ROA % (Net)

2010 2011 2012 2013 2014

Coach 28.74 34.62 36.30 31.26 21.78

Michael Kors 21.34 27.52 40.60 37.83 35.99

ROE % (Net)

2010 2011 2012 2013 2014

Coach 45.17 56.66 57.79 47.13 32.44

Michael Kors 77.45 50.24 53.04 46.49 43.66

 Liquidity Ratios
Quick Ratio

2010 2011 2012 2013 2014

Coach 1.52 1.42 1.51 1.81 1.31

Michael Kors 0.73 1.37 4.09 4.09 4.04

Current Ratio

2010 2011 2012 2013 2014

Coach 2.46 2.45 2.51 2.87 2.28

Michael Kors 1.92 2.81 6.02 5.76 6.11

 Mergers and Acquisitions
- Coach acquires Stuart Weitzman Holdings,
LLC for $573.98 million on January 6, 2015
- Stuart Weitzman - mid-range luxury shoe producer
- Red Flag?

- No significant mergers or acquisitions for

Michael Kors
Fraud Risks
● Refund Fraud
● POS Manipulation
● Employee Theft
● Shoplifting
● Vendor Collusion
● Salaries and Wage Fraud
● Mobile Device
● Finance Statement
Coach Risks to Fraud
● Stores: 1014 +
● Employees:17,000+
● 2014 Revenue: $4,806,226,000
● Potential 5% Loss: $240,311,300
● International Operations: 35 countries
Michael Kors Risk to Fraud
● Stores: 550 +
● In-Store Boutiques: 1500 +
● Employees: 11,094 +
● 2014 Revenue: $3,310,843,000
● Potential 5% Loss: $165,542,150
● International Operations: 95 countries
Continuous Monitoring
● Closed Loop Escalated Alerting System
SAP HANA
● An in-memory, column-oriented, relational database management system
● Developed and marketed by SAP SE.
● HANA'sarchitecture is designed to handle
○ High transaction rates
○ Complex query processing on the same platform.
● Was previously called SAP High-Performance Analytic Appliance, but shortened it
to HANA for aesthetics.
● Available as an appliance through hardware and software, or cloud based, but not
just as software.
● Originally released in November 2010, and has been updated and rereleased
several times since then.
SAP HANA Cost
SAP HANA Benefit
Growth of Data
Implementation of Data Analytics
Coach and Michael Kors have both implemented data analytics into their
businesses in order to optimize operational efficiency and to better predict fashion
trends.
Ron Offir, an advisor who led the digital transformation of Michael Kors and Coach

states:

“Fashion retailers cannot afford to miss sales and disappoint customers due to inventory
or operational disconnects...We simply cannot afford to be delivering sub par customer
experiences online or in store due to a lack of data connectivity or poor visibility to
operational issues.”
Coach and Michael Kors Media Presence
 Sentiment Analysis
● Analysis of customer feedback from online content

● Tagged by positive or negative sentiment organized by gender or geographic area

● Inherent bias in sentiment analysis

Media Sources for Sentiment Analysis
Michael Kors Coach
Michael Kors - Global Sentiment Analysis
Coach - Global Sentiment Analysis
Michael Kors - U.S. Sentiment Analysis
Coach - US Sentiment Analysis
Audit Analytics as a Business Driver
According to research conducted by SAS:

● 27 percent of analytic teams act as service providers

● 38 percent act as consultants
● 25 percent act as business drivers

Coach attributes their success to their use of analytics as a business driver and integrate
it to their strategic approach

Awards:
Michael Kors - received the “Inspired Retailer Award” from Epicor
Coach - lauded for its implementation of SAS
Conclusion: Merge!
 Synergies
- Michael Kors has the more valuable product, Coach has
a well-established superior infrastructure
- Michael Kors has the image of an award-winning
designer, Coach has more retail stores and worldwide
distribution channels
- Michael Kors can consolidate brands and focus on
targeting the top-end market with affordable luxury
items, Coach can focus on the middle-income market
 Pricing
Michael Kors Coach

6 month historical $57.62 $38.12

average stock price

Weighted-average shares 203.75 million 275.9 million

outstanding

Estimated FMV of stock $11.74 billion $10.52 billion

Cash $979 million $592 million

- Michael Kors will need funding from a third party investor

- Lucrative opportunity, considering synergies and dividends
- Perfect timing: after Coach publishes 2015 Financial Statements
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