Could anyone predict that luxury retail would emerge from the 2008-09 recession at an accelerated pace?
According to BrandZ, the world’s largest brand equity database, the value of the world’s top luxury brands increased by an average of 6% during the course of the last year. BrandZ measures the perceived consumer value associated a given brand, in addition to visible factors such as market capitalization. The single-digit 6% increase in brand value for 2012 follows an impressive 15% rise during 2011, led by growth in emerging markets.
Luxury goods makers appear well-positioned on a fundamental basis. Monetary policies throughout the world by the Federal Reserve, European Central Bank, and now the Bank of Japan have resulted in excess liquidity in the market, favoring high-net worth investors who own assets such as stocks and real estate. The wealth of these individuals has grown substantially as equity markets and home prices recover to their pre-crisis highs.
Furthermore, luxury brands will experience additional growth as the middle class in BRIC nations, notably China and India, continues to expand over the next decade. Population and income trends predict that these countries could eventually have more middle class citizens than the entire populace of the United States.
Here are three notable luxury goods makers with solid fundamentals if you believe in the long-term growth story. Two of the companies are preparing to report quarterly earnings, while one company already provided a fantastic report.
Coach
Coach, Inc. (NYSE:COH) markets fine accessories and gifts for women and men under its namesake brand. The American company is experiencing growth in China and within its men’s product line.
On April 23, Coach reported better-than-expected Q3 results. Earnings per share came in at $0.84 on $1.19 billion in revenue vs. $0.81 and $1.18 billion consensus. The positive report came as a surprise, as investors anticipated an in-line quarter given increased competition within the U.S. from the likes of Michael Kors Holdings Ltd (NYSE:KORS) and other luxury brands.
In addition to the men’s collection, Coach, Inc. (NYSE:COH) raised its full-year China sales guidance to $425 million from a previous $400 million. Asian investment firm CLSA views Coach’s international growth story positively and upgraded the stock to a “buy” rating with a $71 price target. Management stated its plans to increase China square footage by 35% during fiscal 2013, while North America square footage should increase 10%.
I continue to view Coach, Inc. (NYSE:COH) positively and believe that shares offer growth at an attractive price.
Michael Kors
Wednesday, May 29 before market open; EPS $0.39 / Revenue $544.7 million
Michael Kors Holdings Ltd (NYSE:KORS) continues to gain preference among women and men for its fashionable leather goods, coats, watches and footwear on a worldwide basis. Following a highly successful IPO in December 2011, Kors completed a secondary offering at $61.50 per share in February 2013, more than three times higher than the $20 IPO price in less than two years time.
Investor appetite for Michael Kors Holdings Ltd (NYSE:KORS) can be justified as the company has experienced positive comparable store sales in every quarter for the last six and a half years. Revenue has grown a massive 69% in the last 12 months, while earnings have expanded 229% based on industry-leading profitability. Kors enjoys a 28% operating profit compared to an average 15% for the luxury goods industry, while its long-term net profit margin of 17% is substantially higher than the 10% industry average.
With respect to upcoming Q4 results, investors are concerned that Michael Kors Holdings Ltd (NYSE:KORS)’s same-store sales may finally begin to decelerate as the brand may reach saturation in North America over coming quarters. However, competitor Coach, Inc. (NYSE:COH) reported a strong quarter on April 23 and raised its dividend, causing investor pessimism on Kors to diminish.
Wall Street believes that concerns over Michael Kors Holdings Ltd (NYSE:KORS) are unjustified ahead of Wednesday’s earnings report. Analysts at Citigroup, Morgan Stanley, and Piper Jaffray have all recommended that clients purchase shares ahead of the fine print. All of the firms have cited positive channel checks, optimistic retail trends, and an upbeat tone from management.
The New York-based Canaccord Genuity also initiated coverage on May 20 with a “buy” rating and $82 price target, the highest on Wall Street.
Tiffany
Tuesday, May 28 before market open; EPS $0.52 / Revenue $855.2 million
The iconic Tiffany & Co. (NYSE:TIF) brand with its flagship Fifth Avenue, NYC retail location, holds international acclaim for its high-end jewelry. Shares meandered throughout 2012 as the company struggled with record-high input costs for precious metals but have risen more than 36% year-to-date through May 21.
While gold and silver prices have fallen a long way from 2011 highs, readers should understand that Tiffany likely entered into price hedging contracts, which locked in high input costs on precious metals. Odds are that management is making good use of current market conditions to lock in gold and silver at multi-year lows.
Wall Street has mixed sentiment on Tiffany & Co. (NYSE:TIF) ahead of Tuesday’s report. Analysts at Wells Fargo downgraded the stock to “market perform” from “outperform” based on valuation and seasonality. Earnings for luxury goods makers are weighted toward the back-half of the year, and the holiday fourth quarter can represent as much as 40% of annual revenue.
Aside from Wells Fargo, analysts at Citigroup have spoken positively on Tiffany following a April 10 meeting with corporate in New York City. Following its meeting with CEO Michael Kowalski and CFO Patrick McGuiness, Citigroup raised its price target to $84 from a previous $68 and recommends the purchase of shares ahead of Q1 2013 results.
Oppenheimer & Co. is also positive on Tiffany & Co. (NYSE:TIF) and raised its price target to $85 based on lower silver prices.
| Coach | Michael Kors | Tiffany | |
|---|---|---|---|
| Market Cap ($) | 16.7 B | 12.3 B | 10.0B |
| Ann. Dividend/Yield | $1.35/2.27% | — | $1.36/1.75% |
| EPS | 3.70 | 1.70 | 3.25 |
| EPS Growth | 10.6% | 229.4% | -4.5% |
| Revenue Growth | 7.9% | 69.0% | 4.1% |
| Price/Earnings | 16.1x | 35.7x | 24.0x |
| Price/Sales | 3.3x | 6.3x | 2.63x |
| PEG Ratio | 1.36x | 1.2x | 2.06x |
| Beta | 1.6 | — | 1.8 |
Foolish takeaway
Shares of Coach, Inc. (NYSE:COH), Michael Kors, and Tiffany are excellent plays on the growth of the luxury consumer worldwide. While many companies struggle with the permanent effects of the recession, the high-end purchaser is gaining confidence as equity and housing markets stage an impressive recovery.
Furthermore, all three companies offer a “backdoor” method to participating in emerging markets growth, without taking additional risk through the purchase of foreign issuers.Thanks for reading, and consider subscribing to my posts for more Fool ideas on outperforming the market.
The article 3 Hot Luxury Stocks with Considerable Upside originally appeared on Fool.com and is written by John Macris.
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