Why You Can't Afford to Ignore Luxury Stocks

A gloomy global economy and sluggish consumer spending have scared many investors out of luxury retail stocks. But blowout earnings and international expansion signal a sweet spot in the designer goods market. Let's look at the winners of high-end fashion and why investors don't want to miss snagging a piece of their growth overseas. 

Design house Michael Kors (Nasdaq: KORS  ) made a fashionable entrance as a public company, with shares gaining more than 100% since its IPO last year. The stock trades at a rich P/E of 81, but at the end of the day I believe in the product and its ability to generate earnings going forward. 

The namesake company has enjoyed tremendous success from its accessories line as well as the brand's Michael selection of lower priced apparel. The Michael segment continues to drive earnings growth for the company -- supplying around 90% of its total revenue.

Kors' product line of trendy chronograph watches has also been a best-seller for the brand. As a customer, I was shocked to discover that watchmaker Fossil (Nasdaq: FOSL  ) supplies Michael Kors with its watches, which Kors then rebrands and sells for between $150 and $500. Smart partnerships like this will drive future business for both Michael Kors and Fossil.

Kors delivered monster results for its first quarter as a publicly traded company, beating Wall Street estimates by $0.20 a share on earnings of $0.28 per share for the period. Kors' position as an affordable luxury brand means its products are accessible to a broader customer base. For this reason, I'm giving the stock an outperform CAPScall rating in my profile on The Motley Fool's CAPS.

The retailer opened 28 new boutique stores during the quarter and plans to operate upward of 400 U.S. stores by the end of the year. By opening itself up to more consumers and expanding into new markets, the Kors growth story is headed for a fairytale ending. 

Clothes up with Coach
In the handbags and leather goods department, retailer Coach (NYSE: COH  ) offers more proof that luxury consumers are ready to spend. Shares of Coach have climbed 31% since February of last year.

The accessories maker's net sales totaled $4.16 billion last year, with 63% of those sales coming from its handbag segment. Nevertheless, retail is a tough business. The margins are tight and the competition is fierce.   

For now, Coach's global traction gives it a leg up on rival retailers; in fact, Japan accounted for 18.2% of the company's net sales in 2011. But it won't be long before Kors gains footing in those markets, which could mean big competition for Coach.

Not so fast
The luxury luck also runs in the blood of athletic apparel company lululemon athletica (Nasdaq: LULU  ) . The stock is up 59% in the past year, and the momentum shows no signs of slowing. As much as I want to include Lululemon as one of the luxury stocks not to ignore, it currently lacks international exposure to key markets such as China.

True, Lululemon has a powerful brand and loyal customers -- I'm one of them. However, the company's only stores outside of the U.S. and Canada comprise just 14 shops in Australia. The real opportunity for investors is tied to the luxury brands that are expanding into China and other emerging markets. For this, let's instead look to True Religion Apparel (Nasdaq: TRLG  ) , which designs and markets high-end jeans.

 Passport to profits
Similar to Lululemon, True Religion enjoys a cult-like following. One important difference here is True Religion's global presence, which includes operations in Europe, Asia, Australia, Africa, South America, and the United States. Around the world, people are willing to pay a premium for the brand's denim. Luckily, investors don't have to pay a premium for the stock. While it only currently gets about 20% of its sales from international segments, its existing foothold gives it a lot to build off.

Company
P/E
Gross Margin(TTM)
Michael Kors 95.22 54.15%
Fossil 28.14 56.34%
Coach 23.48 72.34%
Lululemon 56.90 57.59%
True Religion 14.71 64.45%

True Religion also gains strength from the fact that more than 59.9% of revenue came from direct-to-consumer sales. This is important because the consumer direct business lets True Religion take more of a profit from transactions than the wholesale side of things. Another strong point is the company's recent deal to expand its brand in China.

Chinese consumers are taking center stage and True Religion plans to capitalize on this move. The company plans to open branded retail stores in China and Hong Kong through an agreement with Envols International Trading. China is a risky market for retailers, but this partnership with Envols should help True Religion make a smooth transition.  

A portfolio of luxury
The global luxury goods sector continues to expand. As these companies build an international presence, their stocks should reflect the strong earnings growth. With 300,000 millionaires and climbing, China is on pace to become the world's second-biggest buyer of luxury goods by 2015. That's a market that most stocks can't afford to ignore. The companies I've highlighted here offer high-end retail stocks with robust foreign strategies -- a winning combo. Of course, even bigger plays exist outside of the retail sector. To gain free access to this information, simply click here. You don't want to miss this special free report, which reveals three American companies set to dominate emerging markets.

Fool contributor Tamara Rutter owns shares of lululemon athletica. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and updates on your favorite stocks. The Motley Fool owns shares of lululemon athletica, Fossil, and Coach. Motley Fool newsletter services have recommended buying shares of Fossil, Coach, and lululemon athletica. Motley Fool newsletter services have recommended shorting Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

 


Read/Post Comments (2) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2012, at 7:10 PM, TMFPennyWise wrote:

    Interesting article, Tamara,

    Am I just blinded by Michael Kors' designs (did you see his Fashion Week news clips?) and too optimistic about this stock? I have been a fan for 25 years and can't help but think there is no comparison between Coach, which I think of as somewhat dowdy and and diminished by its ubiquitous 'outlet' presence, and the fresh and stylish Kors designs.

    Even though the valuations are high, I see this as another Lululemon phenomenon. I listened to the company Webcast and was amazed at their aggressive expansion and double digit performance and projections. I give KORS an 'outperform' on CAPS and even bought some on Tuesday as soon as earnings were announced.

    This one will be interesting to watch.

    J.

  • Report this Comment On February 19, 2012, at 12:20 PM, skippiks wrote:

    29% of TRLG's value is straight-up cash. Backing out its cash pile from its market cap drops its P/E to 10.5. I think all these luxury brands offer great opportunities (each for difference reasons), but I'll take TRLG. Of course, I'm always a sucker for companies with tons of cash and zero debt.

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