Sometimes, a brand name says it all. What you wear tells people what image you want to project, how successful you want to look in the eyes of others. Some luxury brands particularly serve to this purpose of indicating socio-economic status. Companies like Michael Kors Holdings Ltd (NYSE:KORS), Coach, Inc. (NYSE:COH), and Tiffany & Co. (NYSE:TIF) seem well poised to benefit from this conjunction as disposable income grows, especially in emerging economies. Holding strong brands, these firms deserve a closer look.
Michael Kors: Customers consider worth the extra price
Michael Kors Holdings Ltd (NYSE:KORS) makes luxury apparel, footwear, and accessories and markets them through retail, wholesale, and licensing channels. Its strong brand name makes customers willing to pay a premium for its products. This has provided the firm with wider margins than most of its peers. Actually, all of its metrics excel those of its competitors.
So, trading at 31 times its earnings, almost double the 17x industry average, is this firm a buy? I’d say that, offering a consensus projected EPS growth rate
of over 28% per year over the next half decade, this stock offers an alluring entry point for long-term investors (as evidenced by the numerous institutional buys over the past few months).
One of the keys to Michael Kors Holdings Ltd (NYSE:KORS)‘ success relies on its strong and long-standing management team, led by CEO John Idol, who used to run other high-end apparel companies like Ralph Lauren and Donna Karan. Some of its growth strategies were questioned in the past, but have proven very effective. Reflecting a good balance between profitability, asset management, and financial leverage, the company’s return on equity and return on assets testifies management’s efficacy. Last quarterly results further back management´s initiatives and portray an encouraging outlook for the times ahead. Earnings rose 123.9% to $0.50 per diluted share, revenue increased 57.1% and sales 36.7%. After closing fiscal 2013, management provided its guidance for FY 2014. Comps are expected to grow 15%-20% and earnings around 23%-25%. With a three year average annual EPS growth of 111% and a history of beating consensus estimates for six consecutive quarters, this target looks achievable.
The strange thing about Michael Kors Holdings Ltd (NYSE:KORS) is that, unlike most of its peers, it still derives most of its revenue and sales growth from the U.S. market. Furthermore, markets like Europe and Asia are highly under-penetrated and contribute with less than 15% of the total revenue, thus providing plenty of growth opportunities.
Coach: Another strong brand name in the luxury segment
Coach, Inc. (NYSE:COH) is one Michael Kors Holdings Ltd (NYSE:KORS)‘ main competitors in the luxury products industry. Although trading at half of Kors´ valuation, at 15.6 times its earnings, its growth prospects also look more limited. Analysts expect Coach, Inc. (NYSE:COH) to underperform the industry in terms of EPS progress, delivering an average annual growth rate of around 12%. So, offering outstanding profitability and growth metrics while trading at discount to its peers, but anticipated to provide lower-than-average development rates, is Coach, Inc. (NYSE:COH)‘s stock a buy?
Well, just like Michael Kors Holdings Ltd (NYSE:KORS), Coach holds a strong brand name for which customers are willing to pay a premium. Actually, its products compete with worldwide leading names like Louis Vuitton or Chanel. This has provided the firm with high client loyalty, pricing power, and returns on capital (of more than 50% over the last year). Moreover, last quarterly results came in ahead of consensus projections, standing as proof of the company´s moat and profitable business model.
Store and product innovation, alongside a cost-effective global sourcing model, should serve as growth catalysts in the long-term. Another one of Coach, Inc. (NYSE:COH)´s main growth drivers for the upcoming years can be found in under-penetrated or not fully efficient international markets.
However, generating over 30% of its revenue outside the U.S., the company is susceptible to currency fluctuations. Furthermore, targeting “aspirational” customers through its moderate prices, while offering high-end products, makes it highly sensitive to discretionary spending power variations.