REPOST: Kate Spade vs Fossil: Handbags will see faster growth than watches in coming years

When it comes to luxury items, handbags and watches have always been head to head. This article talks about how some watchmakers’ approach to production may be holding them back and behind fashion labels popular for their coveted handbags.  

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Upscale fashion accessories have been a bright spot in the U.S. in recent years, with designers and retailers capitalizing on branded items from handbags to watches, categories that are subject to fewer fashion or weather risks than apparel.

However, as both categories are expected to see their growth slow, it looks like handbags may have more runway than watches. Just look at Kate Spade KATE and Fossil Inc. FOSL , for example. Kate Spade shares jumped 10% on Wednesday after the handbag company reported comparable direct-to-consumer sales at its namesake brand jumped 22%, without the benefit of an extra week this year. Its sales per square foot rose for 15 straight quarters, the company said.

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On the other hand, Fossil’s stock dropped 8.5% Wednesday after reporting its global comparable sales fell for a third straight quarter, hurt by waning demand in North America. Retail Metrics data showed Fossil will continue to see declining sales this quarter, compared with a 15% comparable sales gain at Kate Spade, and a 17% jump at Michael Kors KORS . In fact, Michael Kors, whose watches Fossil makes under a licensing agreement, has itself been a big driver of Fossil’s growth.

Fossil rival Movado Group’s MOV stock also dropped 5.3% Wednesday.

“Watches come in and out as fashion accessories,” said Brean Capital analyst Eric Beder in an interview. “We are low in the watch cycle. Handbags are more exciting.”

Beder, who rates Fossil a sell and Kate Spade a hold (because of its stock price), said without Kors, which comprises more than a fifth of Fossil’s sales, the company would have seen even slower growth. While Fossil has unveiled licensed Karl Lagerfeld watches and is set to introduce licensed Tory Burch watches later this year, Beder said those businesses are still too small.

Meanwhile, it remains to be seen what will come out of the company’s discussions with Google GOOG . Fossil  said their talks are “in early stages” but assured investors that it will unveil some products as part of the partnership.

“Fossil has done a great job of offsetting (slowing industrywide watch growth) with acquisitions and new product launches,” Beder said. “They’ve been trying to create the newness. (But a Google-related introduction) is probably a 2015 story. Smart watches (also) haven’t proven a viable category.”

While both handbag and watch sales in the U.S. have slowed in recent years, handbag sales are still expected to see an average of about 4% growth in each of the next four years, Euromonitor data showed. In comparison, sales of watches, after seeing 6.3% growth last year, are expected to slow to 1.7%, 1.3% and 0.5% growth during each of the next three years, with a declining rate seen in 2017, according to Euromonitor. Watch sales totaled about $8.23 billion in the U.S. last year, compared with almost $18 billion for handbags.

Macy’s Inc. M , which reported a better-than-expected first-quarter profit Wednesday, also cited handbags as a strong selling category. It didn’t mention watches.

As industry growth slows, it’s also increasingly become a market share battle. Fossil, which gave a disappointing second-quarter forecast, said it will increase marketing and other spending to drive demand. Beder said Fossil, like Coach COH , has lost share in the handbag business because its leather merchandise isn’t as “fashionable or fashion right” as that of Kate Spade or Kors.

In another investor concern, with Fossil’s dependence on Kors, Nomura analyst Simeon Siegel estimated the company may have to pay Kors a higher royalty rate as their existing contract expires late next year. He estimated Fossil pays Kors about a 10% royalty rate, below the company average rate of about 15%.

“Focus surrounding a potential renegotiation of the FOSL/KORS royalty rate is top of mind,” Siegel wrote in a report.

To be sure, while Fossil’s growth in the U.S. may be slowing. Like Kate Spade, it also is expanding and seeing growth on the international front. Fossil said its European and Asian wholesale watch sales in the first quarter each rose in the double-digits.

“Global growth story keeps on ticking” for Fossil, Cowen & Co. analyst John Kernan said. “The Michael Kors (licensed) watch and jewelry business should continue to support long-term sales growth.”

Bocci + Bii makes bold, fashion-forward leather handbags and accessories for individuals who refuse to blend into the background. Follow this blog for more information about the brand and its collections.