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Wall Street has high hopes for this once-shunned retail stock

Customers carry Coach Inc. shopping bags after shopping at a store during a charity preview event on the eve of the grand opening of the Outlet Shoppes of The Bluegrass in Simpsonville, Kentucky.
Luke Sharrett | Bloomberg | Getty Images
Customers carry Coach Inc. shopping bags after shopping at a store during a charity preview event on the eve of the grand opening of the Outlet Shoppes of The Bluegrass in Simpsonville, Kentucky.

It wasn't long ago that Coach was the most scorned of the three affordably priced luxury handbag makers. Now, with it, Michael Kors and Kate Spade on deck to report their latest quarterly earnings results, the former laggard has emerged as a favorite among several Wall Street analysts.

With Coach's North America division expected to report its first quarterly comparable-sales gain in three years, analysts' expectations are high. The retailer's stock has received two upgrades in as many weeks, as Wall Street becomes more convinced that its turnaround is sustainable. Meanwhile, the label's shares are up nearly 35 percent over the past year, despite slipping nearly 4 percent toward $41 in trading Tuesday.

That doesn't mean investing in the leather goods maker is without risks. Overall sales trends in the handbag space remain muted, as the industry grapples with excess inventories and heightened promotions. Meanwhile, traffic at outlet centers — where Coach generates some 40 percent of its revenue — continues to be pressured by a slowdown in international tourism.

"Coach is the best-positioned company in the 'affordable luxury' accessory group," said Credit Suisse analyst Christian Buss, who upgraded the company's shares to "outperform" from "neutral" last week.

"We believe stabilization in Coach's core business, combined with a possible acquisition narrative could help drive significant, sustained earnings power long term," he said.

Coach's transformation has been marked by incremental victories along the way. After years of saturating the market with promotions and logo merchandise, the company ended a slog of quarterly revenue declines in January, when it said sales grew for the first time in more than two years. Yet analysts remained somewhat skeptical about a real turnaround, as much of that gain was tied to its acquisition of the Stuart Weitzman footwear brand.

But as Coach has regained some of its pricing power and snagged shelf space at higher-end retailers, analysts are likewise becoming more confident that its burgeoning rebound is sustainable.

Adding to their conviction is Coach's relatively small exposure to the heavily promotional department store space, which accounts for less than 5 percent of its sales, according to Wells Fargo. And late Monday, Coach announced the expected sale-leaseback of its new headquarters in New York City, representing a gain of $30 million. Analysts said a portion of that money could be used to fuel future acquisitions.

Wall Street expects Coach to post a 16 percent increase in revenue, to $1.17 billion, when it reports earnings next week, according to a consensus estimate from Thomson Reuters. Analysts predict earnings per share will rise 31 percent, to 41 cents a share.

Elsewhere in the affordable luxury space, analysts are calling for a 17 percent lift in revenue at Kate Spade, to $318 million. But while the name remains a favorite among analysts, they are somewhat cautious about the fashion house's fiscal second-quarter results, which it reports Wednesday.

Wells Fargo analyst Ike Boruchow told investors that he sees "slight risk" to the company's comparable sales and gross margins for the recently ended three-month period, due to what he called "spotty" traffic and pricing. As a result, Boruchow said Kate Spade's comparable-sales gain could be closer to 9 percent or 10 percent, compared with Wall Street's expectation for 13 percent growth. The company has been generating some of the most robust same-store sales gains over the past few quarters.

Wolfe Research analyst Adrienne Yih Tennant likewise raised caution over Kate Spade's margins, as it was more promotional year over year in June. Still, she called the company "one of the most compelling millennial brands." And given the recent run of Coach's stock, Cowen and Company analyst Oliver Chen said he prefers Kate Spade as his favorite player in the handbag space.

At near $20, Kate Spade shares are up slightly over the past year.

Analysts are least optimistic about Michael Kors, where sales are expected to have contracted 3 percent, to $953 million, in its fiscal first quarter. Thomson Reuters forecasts are likewise calling for a decrease in the company's earnings per share, to an average of 74 cents a share, compared with 87 cents a share in the year-ago period.

The fashion brand is working to reduce its distribution in the challenged department store space, where widespread promotions have dented its pricing power. Michael Kors generates an estimated 40 percent of its revenue in these stores, according to Citi.

After seeing its comparable sales turn slightly positive in the fiscal fourth quarter, Wall Street expects them to return to negative territory for the fiscal first quarter and decline roughly 4 percent, according to Retail Metrics. The brand will release its results next week.

"Our data indicates that management has stuck true to its word by meaningfully scaling down inventory in the wholesale channel," BMO Capital Markets analyst John Morris told investors. "While we commend the improvement, we still need to see an improved promotional environment in order for us to feel more bullish about the company."

Michael Kors shares are up 22 percent over the past year, near $51.