Its a well-known fact that luxury stocks outperform the market when global economies are recovering. This resonates with the current macro economic situation. Both consumer confidence and personal disposable income are on the rise, which is steadily translating into higher consumer spending. This is the reason that luxury companies have performed well over the last year, and will most likely continue to soar.
To begin, Tiffany & Co. (NYSE:TIF) is a leading jewelry chain based in the U.S., which dons a market cap in excess of $10 billion. Its shares have risen by nearly 40% YTD, outperforming most indices around the globe. Yet, analysts estimate its annual EPS growth to average around 11.7% for the next five years.
But, the Japanese Yen has depreciated by nearly 20% over the last quarter, which somewhat changes the equation. As of now, Tiffany generates 17% of its total revenue from Japan, and the Yen’s recent depreciation should shrink its overall revenue by 3.4%. But, that doesn’t call for shorts.
During the recent quarter, Tiffany & Co. (NYSE:TIF) increased its store area in Japan by 20%, which offset losses caused by the depreciating Yen. Besides, Tiffany has also been reporting impressive sales growth in most of its markets, especially in Asia-Pacific. Its quarterly sales from Asia-Pacific grew by 14.5%, while even the financially troubled Europe reported a 6% quarterly sales growth.
With a modest debt/equity ratio of 37% and a healthy current ratio of 5.33 times, Tiffany & Co. (NYSE:TIF) sports a clean balance sheet. And, to investors’ delight, its shares yield 1.72% with a modest payout ratio of 38.89%. Analysts at Oppenheimer estimate its fair price to be $85, which still calls for a 10% upside.
Michael Kors Holdings Ltd (NYSE:KORS) has been one of the most consistent, yet explosive, U.S.-based luxury stocks. Its annual EPS has grown by 121% during the past five years, and analysts still estimate its annual EPS to average around 28.7% for the next five years.
For the recent quarter, Michael Kors Holdings Ltd (NYSE:KORS) posted a 52% revenue growth in North America, while European nations reported an impressive 97% revenue growth. Meanwhile, the company opened just three new outlets in the U.S. and one new outlet in Europe. Its revenue surge can be attributed to impressive growth in its quarterly same store sales and 500 store conversions in FY13.
In my opinion, organic growth is always better than inorganic growth.