Coach, Inc. (NYSE:COH) reported last quarter results that put sales at $1.16 billion, versus the same quarter last year of $1.05 billion. EPS also came in higher at $0.77, compared to $0.73 last year. Coach is seeing strengthening fundamentals and rising demand for its products, where the addressable market for women’s accessories in North America grew by 10% for its last fiscal quarter. Based on Coach’s recent strong performance we believe that other companies in the specialty retail sector will also perform well. These include companies such as Ralph Lauren Corp (NYSE:RL), Fifth & Pacific Companies Inc (NYSE:FNP), Estee Lauder Companies Inc (NYSE:EL) and Tiffany & Co. (NYSE:TIF).
The weak economy and high unemployment has pressured specialty retailers—the Dow Jones U.S. Specialty Retail index is flat over the past twelve months, compared to the Dow Jones Industrial Average, which is up 10% over the same period. Yet, differentiated accessories have been showing strength over the past few months. Bain & Co. sees global sales of personal luxury goods up 10% in 2012, led by Asia, up 18% and the Americas, up 13%.
Coach has been focusing on growing its already dominant-position in North American women’s accessories, but outside of its key market, Coach has also doubled Coach Men’s segment revenues to over $400 million and grew sales in China over 64%. The company also expects to grow global retail square footage 12% next year, with a focus on the U.S. and China. Citing new products and a new pricing strategy—which appeals to both high-end and value customers—S&P reiterated its $70 price target.
Ralph Lauren is looking to expand their product line to open itself up to more consumers. This includes offering handbags, footwear and denim. The company is also turning a focus to e-commerce and overseas expansion, opening fifteen new stores in China for 2012. Ralph Lauren, much like Coach, is also looking to implement a different pricing strategy that will expand its customer base—this should help drive next year’s 14% EPS growth.
Fifth & Pacific has recently been through a transition phase, having sold Liz Claiborne and Monet brands to J.C. Penney and Dana Buchman to Kohl’s. However, the company has retained its core brands—Juicy Couture, Kate Spade and Lucky Brand—and plans to grow via e-commerce expansion. The company’s Juicy Couture brand has been dragging it down however, but a turnaround from improvements in pricing and product mix is expected in the next two to three quarters—driving next year's EPS growth to 300%.
Estee Lauder is still executing its four-year strategy that it implemented in 2009, where it plans to further lower its costs and expand non-U.S. sales. 2013 sales are expected to be up 7% as the company expands overseas and refocuses more on the higher margin skincare business. Estee is also seeing positive growth in its high margin travel retail segment, which should continue to grow with a rebounding travel industry.
Tiffany’s expects to see 2012 sales up 6%, and is supported by its retail expansion initiative—opening nineteen stores next year, but the company will experience some slight margin compression due to higher diamond and precious metal costs. Same store sales were up 1% for the first half of the year, being held down by an 11% decline in Japan due to store closures.
Of the specialty retailers, fund interest in Coach was the most notable, with Jim Simons as the top fund owner by shares in 2Q at 4 million shares—a 150% increase from 1Q. Meanwhile, Israel Englander also increased his stake, by over 500%, as well as tiger cub Patrick McCormack, by over 50%. Ralph Lauren saw Jim Simons and Lone Pine Capital upping their 1Q stakes by 190% and 45%, respectively. Fifth & Pacific also called Patrick McCormack a shareholder in 2Q, and Ken Fisher as its top fund owner by shares, with both fund managers taking new positions.
Specialty retail bulls, Lone Pine Capital and Jim Simons, were also top investors in Estee during 2Q, where Simons upped his 1Q stake by over 300%. Of all the companies, Tiffany’s saw some of the lowest interest from top name funds in 2Q, with the most notable being Select Equity Group, which took a new position that made the firm the top fund owner at almost 2 million shares—what exactly do hedge funds see in Tiffany’s? On the whole, fund sentiment was overwhelmingly positive for all the specialty retail companies we listed.
This group is expected to grow their EPS by at least 11% a year over the next half-decade, with Coach as the leader, sporting an expected CAGR of 15%. All the companies listed trade in line on a P/E basis, expect Coach. Coach trades at a trailing P/E of 16.5x, well below the average of the others, 24x. We see Coach as one of the more compelling picks, with Ralph Lauren another solid buy. Although Fifth & Pacific has some turnaround issues, the company should outperform in the longer-term. The company with perhaps the best growth potential is Estee, while Tiffany’s should benefit from a rebound in Japan.