How to Trade the Global Luxury Market Today
Sep 13th 2012 3:21PM
Updated Sep 13th 2012 3:28PM
Luxury retail stocks got a beating earlier this week following Burberry's announcement that it would cut its full-year profit outlook. The London-based fashion house blamed weakness in the luxury goods sector for a possible shortfall in sales. Other global luxury stocks traded down on the news, including Richemont, Christian Dior, and Louis Vuitton Moet Hennessy. Meanwhile, luxury brands on this side of the pond couldn't catch a break either.
Shares of Tiffany (NYS: TIF) slid 1.4% along with Coach (NYS: COH) , which fell 2.5% in midday trading. However, Ralph Lauren was the biggest loser, slipping as much as 3.5% early Tuesday morning. But before we run screaming from high-end retailers as a whole, let's dig into the individual figures and see if we can find some hidden winners among the group.
A closer look at other European premium-goods businesses reveals that this may be a Burberry-specific problem. Consider this: Hermes International reported a 28% spike in profit for the first half of the year. Moreover, the French company "raised this year's sales-growth target after earnings beat estimates on Asian demand for luxury products," according to Bloomberg. Similarly, Italian design house Salvatore Ferragamo posted double-digit profit growth for its most recent quarter.
Even U.S. brand-name retailers are putting up promising numbers, despite a so-called slowdown in luxury spending. Coach wrapped up fiscal 2012 in style with diluted earnings climbing 21%, and revenue up 15% at $4.7 billion for the year. One factor that likely contributed to this is that, unlike Burberry, Coach kept customers pouring through its doors by lowering prices.
On the other hand, during a visit to Miami in May, I couldn't believe the outrageous prices in Burberry's outlet store at Sawgrass Mills. I was shocked to find that a simple 5x7 picture frame in the company's factory location cost a whopping $185. Less surprising was the fact that hardly anyone was in the store, as most outlet shoppers were next door lining up in front of the Coach outlet.
Striking a balance between discount and full-price inventory is critical for high-end retailers, whose brand image depends on it. Just ask Saks Fifth Avenue. The once upscale department store forever tarnished its over-the-top brand reputation after it began wildly discounting merchandise in 2008, during the wake of the Great Recession.
Yet other designer firms have flourished in this regard. Look at Michael Kors (NYS: KORS) , for example. The accessories powerhouse has been on a roll since its initial public offering last year, with shares up more than 95% year to date.
Similar to Coach, the namesake company has become a fashion sensation by offering affordable designer goods. In fact, the company's Michael line, which offers a selection of lower-priced apparel, has been a runaway success for the design house -- supplying around 90% of its total revenue.
Kors has also enjoyed a nice run thanks to its popular collection of chronograph watches and other accessories. Talk about the power of branding: The company actually buys the watches from Fossil (NAS: FOSL) and later rebrands them to sell under the Michael Kors name.
Fossil is a promising fashion retailer on its own, and the stock could be a better bet for investors over Michael Kors, whose shares trade at more than 59 times earnings. Let's see how these stocks measure up in terms of stock performance.
Kors' stock has markedly outperformed the others, followed by lululemon athletica (NAS: LULU) and Fossil. The luxury yoga-wear store is another top-end retailer that continues to shine amid a bruised economy. Lululemon was put to the test last year when it was forced to tackle inventory problems. However, the company has returned from those setbacks stronger than ever.
Shares of Lululemon are up more than 62% year to date, though critics worry that much of the growth is already priced into the stock, which currently trades around $76. However, I think it's a mistake to underestimate the company's aggressive growth strategies, both in new product categories and internationally.
Additionally, the expensive athletic brand reported a 33% bump in net revenue and a 50% increase in earnings for the quarter ended July 29. As a result, Lululemon raised its earnings outlook for full-year fiscal 2012.
Playing for keeps
When you look at the numbers that these other upscale retailers are posting, it's hard to believe that Burberry's problems are solely the result of broader market concerns. Overall, higher-end brands have had a solid year despite global economic weakness. The upcoming holiday shopping season should give brands like Coach, Michael Kors, and Lululemon even more momentum heading into 2013.
Investors who aren't afraid to tap into the global luxury market should consider Kors and Lululemon. These companies in particular are successfully expanding into international markets, which makes them great alternatives to a name like Burberry. To learn more about top-notch retailers on both ends of the spectrum, take a look at our recent special free report: "3 Companies Ready to Rule Retail." It's only available for a limited time, so download your copy today.
The article How to Trade the Global Luxury Market Today originally appeared on Fool.com.Fool contributor Tamara Rutter owns shares of lululemon athletica. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of lululemon athletica, Coach, Tiffany, and Fossil. Motley Fool newsletter services have recommended buying shares of Fossil, lululemon athletica, and Coach. Motley Fool newsletter services have also recommended shorting Tiffany and Fossil. 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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