Coach, Kors learn smaller can be better

Americans are bored with the usual handbag options, but when they are buying, smaller is better.

On Coach's most recent earnings conference call, CEO Victor Luis told investors the "North American premium women's handbag and accessories market was essentially flat in the December quarter" and Michael Kors CEO John Idol took it a step further in his company's earnings call saying: "the global market for luxury handbags is approximately flat."

However, while the handbag category was flat in dollar sales, Kors unit sales rose by "very strong double digits" thanks to stronger selling of smaller, crossbody handbags and wallets, Idol said.

Leather handbags sit on display in the window of a Michael Kors Holdings Ltd. luxury store.
Martin Divisek | Bloomberg | Getty Images
Leather handbags sit on display in the window of a Michael Kors Holdings Ltd. luxury store.

Idol told investors the smaller handbag trend started two years ago, but it took a while for handbag makers to figure out how to best capitalize on selling smaller bags, which tend to come with smaller price tags.

"We believe that when somebody is coming in and interested in a crossbody, they need a new wallet because the wallet size is smaller in a crossbody versus a mid-size handbag," Idol said.

It's the classic retail up-sale — and it appears to be working for the brand, thanks in part to a strong reliance on smartphones.

"As more things end up on your phone, you need less things in your wallet," he said.

If Idol is right, the smaller handbags and wallets could be a trend that's here to stay.

One of the new smaller handbags Coach is counting on for success in the current quarter is the Chelsea Crossbody, which Luis calls "a key under-$300 item."

Jefferies analyst Randal Konik points out the shift to smaller bags is "likely to weigh on the handbag sector for the next several quarters," but he expects it will be offset by more units purchased thanks to the "burgeoning 'bag-cessories' trend."

It's not just Michael Kors and Coach that are going after the crossbody demand. Cowen & Co. analyst Oliver Chen noted Rebecca Minkoff as a key player in the segment, saying "this silhouette represents their core product" adding that the collection could "own the space of the millennial's 'going-out bag.' "