With talk of economic troubles, recession, and rising interest rates never far from the headlines, it might seem like an inauspicious time to talk up the virtues of stocks in the luxury sector.
But companies operating in this space have several advantages. They boast enviable brand strength, strong margins, and considerable pricing power. By definition, they cater to consumers at the upper end of the economic spectrum. These customers tend to have more disposable income and aren't as affected by an economic downturn as the average consumer.
Overall, the luxury market is a good place to be. Market research company Euromonitor International calls "personal premium goods" a $370 billion market and forecasts that it will grow at a 6% to 8% compound annual growth rate between now and 2025.
That said, here are three top luxury stocks for long-term investors to consider adding to their portfolios.
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1. Oxford Industries
Oxford Industries (OXM 0.91%) might not be a household name, but the parent company of Tommy Bahama is a luxury powerhouse.
Oxford's 64.6% gross margins indicate that this is a strong brand for which consumers are willing to pay a premium. Tommy Bahama has carved out a nice niche for itself as an aspirational product for consumers who want to sport its polos, floral shirts, and sandals at the beach, on vacation, or even just at backyard get togethers.
The company is shrugging off any macroeconomic challenges, growing revenue by 26% year over year during the most recent quarter, and the company was even in position to upgrade its full-year guidance.
Despite this strong performance, the stock still looks like a bargain, trading at just under 11 times earnings and under 9 times forward earnings. Additionally, the company has paid a dividend every quarter since going public in 1960, and shares currently yield just over 2%.
Oxford Industries looks like a premium luxury stock that you can add to your portfolio today for a discounted price.
2. Canada Goose
Like Tommy Bahama, Canada Goose (GOOS 1.17%) is a maker of aspirational, high-end apparel for which customers are willing to pay a premium, contributing to the company's strong 67% gross margins.
However, unlike Oxford Industries, which derives most of its revenue in North America, Canada Goose derives about 20% of its revenue in the Asia-Pacific region, and thus investor fears over China's on-again, off-again lockdowns have hit Canada Goose shares hard this year. (Note that the company doesn't specifically break out what percentage of revenue is from China.)
These challenges caused Canada Goose to trim its earnings and revenue guidance. But these concerns appear to be priced into the stock, which is down 55% year to date and trades at just 10 times forward earnings.
While concern is warranted, the company is performing better than one would expect given the circumstances, growing revenue by 19% during the most recent quarter. If and when China ends its "zero COVID" policy, it should again become a big opportunity for the company as opposed to a challenge. CEO Dani Reiss maintains that Canada Goose has a strong brand in China and that long-term demand will rebound.
In the meantime, the company is making progress on expanding its presence in new markets, including South Korea, Japan, and the western United States (with new physical locations in Las Vegas and Denver). Additionally, Canada Goose is expanding beyond its core winter gear offerings and leveraging its brand strength to enter new segments of the apparel market.
Lastly, it recently implemented a share repurchase program that will allow it to buy back nearly 10% of its public float. For just 10 times forward earnings, this luxury stock with strong brand power looks like a decent bet to bounce back in 2023.
3. Tapestry
Like Oxford Industries, Tapestry (TPR 1.68%) is a parent company with a portfolio of luxury brands. Its portfolio includes Coach, Kate Spade, and Stuart Weitzman. During the first quarter of its fiscal 2023, Tapestry reported record Q1 revenue of $1.5 billion. The company grew revenue 5% and international sales by 11% year over year on a constant currency basis.
As with Oxford Industries and Canada Goose, its shares look appealing, trading at just 11.5 times earnings and under 9 times forward earnings. The shares also look attractive from a price-to-earnings-growth (PEG) ratio perspective. Right now, the company sports a PEG ratio of about 0.9. In general, investors view a stock trading at a PEG ratio of under 1 as undervalued, so Tapestry looks like a buy based on this metric.
The company also pays out the best dividend yield -- 3.3% -- within this group. During the first quarter of 2023, Tapestry returned $175 million to shareholders via a combination of dividends and share repurchases.
The company reports that it bought back 3 million shares in the period at an average price of $33.83, which is a nice discount to today's share price. And it plans to return a lot more capital to shareholders in 2023 -- Tapestry says it is on track to return $1 billion to shareholders in 2023 through dividends and share repurchases.
Overall, luxury stocks look well-positioned to handle whatever economic conditions 2023 throws at them. These three look like top buys for long-term investors based on their resilient revenue growth, returns to shareholders, and attractive valuations.
