Some analysts view the luxury goods sector as being recession-proof. This has been the case for most of the years after the 2008 financial meltdown. But are these companies really armored against the current economic situation? The decline in China’s sales has been affecting most of the companies on the industry as sales in other regions such as Europe or US have been sluggish. It's important to pick stocks with high-quality business models. As mentioned in this interesting blog post, prominent investors like to select stocks with durable competitive advantages. So, luxury goods companies should take a look at their business models just in case this situation persists.
Let’s take a look at three companies in the luxury apparel market: PVH Corp (NYSE:PVH), Michael Kors Holdings Ltd (NYSE:KORS) and Ralph Lauren Corp (NYSE:RL). This could give investors a hint as to where the industry is heading amid slowing sales and if companies have solutions for it.
PVH: Costly acquisition but growing revenue
PVH Corp (NYSE:PVH) is an American company that sells luxury apparel with a diversified brand portfolio that includes Calvin Klein, Tommy Hilfiger, Van Heusen and Arrow. PVH acquired Warnaco, a smaller apparel distributor in Feb. 2013 for $2.9 billion. This has bumped up costs for PVH as it spent $235 million in the integration, restructuring and debt modification of Warnaco and posted a net loss of $20 million for the year as compared to a net income of $95.5 million for 2012.
However, it's worth noting that the company's revenue for the latest quarter has increased 36% to $1.9 billion as compared to the prior year’s first quarter. Warnaco’s acquisition will give PVH Corp (NYSE:PVH) a better distribution channel and more control over the Calvin Klein brand. This is seen as a good sign by the market, with PVH Corp (NYSE:PVH)’s share surging more than 8% this week. I think that PVH has a great opportunity for future growth as the Warnaco acquisition costs have been deployed and now it can focus on developing synergies and expanding its Calvin Klein brand that will surely increase its short-term profits.
Michael Kors: Impressive results
Michael Kors Holdings Ltd (NYSE:KORS) is another luxury apparel brand with important geographical diversification: it has 191 stores in the US as well as 46 international stores. Its revenue is generated by its retail segment (48.1% of total revenue) and the wholesale segment (46.9% of total revenue). This company has been exhibiting outstanding revenue growth, going from $508 million in 2010 to $2.1 billion in 2013 for more than a 300% increase.
Its latest results also confirm the good moment that the company is enjoying: its net income rose 130% to $101 million, compared to the fourth quarter of 2012. Moreover, Michael Kors Holdings Ltd (NYSE:KORS) has great margins as its income from operations stood at $630 million which signified a 28.9% of total revenue. The company is surely not feeling any economic slowdown. The company's stock has had its ups and downs in the past six months, but it has gained 23% since December 2012. This is another company that could be a great bet for the apparel sector. It has controlled costs which is an important factor when sales are declining, thus increasing its net income substantially.