Michael Kors, Coach in second round of Kate Spade auction - sources

By Lauren Hirsch and Greg Roumeliotis

(Reuters) - Michael Kors Holding Inc and Coach Inc are among the companies that have made it through to the second round of bidding for handbag and accessories maker Kate Spade & Co , people familiar with the situation said on Friday.

The interest in Kate Spade underlines the appeal of its young clientele to other retailers as handbag makers struggle to capture the interest of shoppers inundated with options.

Michael Kors and Coach face competition from other bidders, including a non-U.S. party, in the auction for Kate Spade, the people said, asking not to be identified because details of the sale process are confidential.

The process is still roughly a month away from an outcome, and there is no certainty a sale will occur, the sources added.

Kate Spade, which has a market capitalisation of $2.9 billion, declined to comment. Michael Kors also declined to comment, while Coach did not immediately respond to a request for comment.

Affordable luxury brands such as Michael Kors and Coach have suffered after they expanded their retail presence too quickly and sold too heavily in outlet stores, diluting the exclusivity that once caused shoppers to line up for the next hot handbag.

These brands have been hurt as fewer shoppers in malls have led to fewer handbag sales, while a stronger dollar has made it difficult for them to maintain their popularity with tourists visiting the United States.

Kate Spade would offer Coach and Michael Kors greater pricing power with department stores as well a younger clientele.

Coach has been seeking to diversify its business beyond handbags, and it paid $574 million for designer footwear company Stuart Weitzman in 2015.

Michael Kors, which sells apparel, handbags, watches and other accessories, said in its most recent earnings call it was "actively looking" at potential acquisitions and that it probably would not do small deals. The company has been focussed on a turnaround by improving its outlets and stores.

Kate Spade has been under pressure from a small New York-based hedge fund Caerus Investors. Caerus sent a letter to Kate Spade's board in November, stating it was "increasingly frustrated" by the inability of the retailer's management to achieve profit margins comparable with industry peers.

Separately, investor Barry Rosenstein's activist hedge fund Jana Partners LLC has revealed a 0.85 percent stake in the company.

(Reporting by Lauren Hirsch and Greg Roumeliotis in New York; Editing by Cynthia Osterman)