A Luxury for Your Portfolio
Apr 12th 2012 1:27PM
Updated Apr 12th 2012 4:40PM
In a recovering economy, you would think that luxury goods would be one of the last sectors to rebound. Think paying down ballooning debt would be higher on its list of to-dos? Think again. Luxury retailers have done remarkably well in the past year, encouraging others to join the fad. Classy luggage maker Tumi is on the IPO train -- should you hop on?
First class, please
See that guy two rows ahead of you in first class drinking Crown? His carry-on is Tumi.
You can hate him, but the suitcase really is great. The company makes an iconic series of black luggage, from duffels to backpacks. They are high quality, surviving the fury of unionized baggage-handlers flight after flight.
Luckily for Tumi, there are plenty of people shelling out the cash for premium travel gear. Sales were just shy of $200 million at the end of fiscal 2009. In the last twelve months sales have tipped over $310 million.
Tumi has an incredibly strong brand, with sales ringing in at a compound annual growth of rate of 12% and major expansion on the horizon.
There's no business like selling social status
Luxury retailers such as Coach (NYS: COH) and Michael Kors (NYS: KORS) have been fantastic companies to own in the past year. Also, both companies have succeeded at steering product innovation toward the men's sector -- an area historically neglected by the fashion houses.
Tumi is slightly different in its growth plans, as it is just now expanding its women's lines. A mature segment for most luxury retailers, women's products represented only 10% of sales in 2010.
When Kors hit the exchanges in late 2011, net income had grown 85% over the previous year.
Tumi's 2010 net income swung into the positive in a big way after a 2009 loss. In the last nine months its revenue has grown 37% over the year-ago period, and net income has ticked up 2%. Not quite as impressive as Kors' 2011 tear, but nothing to turn your nose up at.
Asia buys more than U.S. debt
While the U.S. is still the main market for luxury goods, each year more and more sales are made in the East. Many even believe China will overtake the U.S. as the world's largest luxury goods market within the next year.
High-end clothing retailer Ralph Lauren (NYS: RL) turned much of its attention toward Asian markets after sales tripled during the last five years. And yet those numbers represent only 12% of the company's sales. Management wants to push that number closer to one-third of all sales in the near future, fueling double-digit growth for the company as a whole.
Does the boom extend to luggage? Tumi's cheaper but much bigger rival, Samsonite, expects a 20% increase in Asian sales this year after last year showed 48% growth.
Tumi's market timing is no doubt influenced by the results from other luxury good makers. Consumers and shareholders alike love luxury, so this is as good a time as ever to enter the public markets.
As with many hot IPOs, the valuation is a little rich. At the proposed price of $15 to $17 per share, the company could open at 3.5 times 2011 sales -- compared to an average of 0.6 times sales for a basket of similar companies, according to Bloomberg.
All in all, these luxury retailers are flying high. Coach has been flirting with its 52-week high -- a nice 60% gain since the stock's nosedive in August of 2011. The Kors IPO came out last year at $20 and currently trades near the $40 mark. Based on Tumi's growth and strategy, I believe this could be another successful lux-stock pick if the price is right.
This company can sell backpacks for $600 and carry-ons for a grand. Whether or not you agree with its pricing, that is a great market position.
If you aren't too impressed by Asia's growth, head south instead. Our analysts know of a great retailer in South America that is taking over -- and it's not Wal-Mart. Think you know what it is? Check your answer with this free report: "The Motley Fool's Top Stock for 2012."
At the time this article was published Fool contributor Michael Lewis owns no shares of the stocks mentioned above. Motley Fool newsletter services have recommended buying shares of Coach. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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