The apparel and accessories industry is heavily dependent upon consumer spending, which accounts for more than two-thirds of U.S. economic activity. Despite weakened spending early in the year, U.S. consumer spending rose 0.5% in June and is expected to continue increasing. This should be beneficial to three well-known apparel and accessories companies that are best suited for the long run.
Frames for solid growth
Luxottica (NYSE: LUX ) reported strong sales in the second quarter of fiscal year 2013. Its net profit rose to $281.8 million from $257.9 million in 2012. For the first time in Luxottica's history, sales exceeded $2.7 billion. Sales in Mediterranean countries were up 11% compared to the previous year, while continental Europe's results grew almost 15%. It posted double-digit growth of 22.3% in emerging markets.
Luxottica's brands enjoy good visibility with strong brand recognition and growth in the Oakley, Sunglass Hut, and Armani collections. Ray-Ban and Oakley reported excellent performance. During the second quarter, Sunglass Hut reported an increase of 7.3% in same-store sales. On July 4, the group opened a Sunglass Hut flagship store in New York's Times Square, which aims to be their first store to generate eight-figure sales. Also, a licensing agreement to make sunglasses for Giorgio Armani will increase Luxottica's earnings. Revenue from the Armani license could rise to about $266 million in the coming years.
Since 2004, the company has been aggressively acquiring businesses in new markets around the globe to meet the demand for its top-selling products. Last year, it made four acquisitions including Grupo Tecnol in Brazil and retail chains in Spain, Portugal, and Italy. Exposure in emerging markets is a strong tailwind for Luxottica; not just in terms of the number of consumers, but also in the potential for the growing middle class to move up to premium brands.
The secret behind growth
The Victoria's Secret brand is the key driver behind L Brands (NYSE: LB ) . Over the last three years, Victoria's Secret's direct sales increased at an average annual rate of 5%. Victoria's Secret has a wide presence in the U.S. market with over 1,000 stores. To enhance the brand's overall store productivity, L Brands has been closing under-performing stores. As a result, revenue per square foot has jumped from $581 to $817 over the last three years. By the end of 2013, the company plans to close another 18 Victoria's Secret stores.
L Brands also plans to expand Victoria's Secret's PINK brand in the U.S. market. This business targets college-aged girls, who make up around 25% of the U.S. female population. This provides huge future growth potential. In the last two years, L Brands has opened only 21 PINK stores, but aims to an additional 50 locations in fiscal year 2013. It is also adding full-line merchandise of PINK to its existing stores to accelerate sales.
Expanding its international footprint presents a strong opportunity for L Brands. In Canada, it has 26 stores and plans to add eight more locations by the end of this year. Its Secret Beauty & Accessories line has 126 stores but the number of locations will reach 200 by the end of this year. It is also increasing its U.K. stores in areas such as Manchester, Leeds, and Sheffield. By normalizing the U.S. market for population, and considering that the U.K. is around 20% the size of the U.S, the U.K. presents a $600 to $700 million market.
Continuous momentum in growth
Gap (NYSE: GPS ) is a famous American retailer with brands like Gap, Old Navy, Banana Republic, etc. Company-wide sales trends improved for July. Total revenue for July increased 5% to $1.1 billion. Gap and Old Navy continue to experience a favorable response to better product execution, and shoppers responded well to the lineup of summer products at these stores.
The company is continuously expanding globally. Over the last six years, it has considerably grown its store base and currently has over 300 franchised stores across the world. It will launch Gap brand in new regions through agreements with existing franchise partners including Neutral in Paraguay and Gottex Brands in Hungary.
Gap plans to open the first stand-alone Banana Republic stores in Mexico through an existing agreement with retail partner Distribuidora Liverpool. By the end of this year, the company aims to open in other Latin American countries like Chile, Panama, Colombia, Uruguay, Paraguay, Peru, and Brazil.
The company has a solid balance sheet that has been gradually improving. In 2011, it took on debt of $1.6 billion with a five-year term. This was accessed to perform financial activities like share buybacks. This resulted in total long-term liabilities rising 185.3% to around $2.5 billion at the end of 2011 from $890 million at the end of 2010. However, the situation is improving. At the end of the first quarter of 2013, its long-term debt declined 22.4% to $1.2 billion and total long-term liabilities decreased 14.3% to about $2.2 billion. This, in return, improved its debt-to-equity ratio from 1.7 to 1.3.
Success with Armani could entice other licensed brands to work with Luxottica. It is growing rapidly in emerging markets and its popular brands are performing well, making it an attractive stock. Store consolidation in the U.S., expansion of PINK, and international growth create a bright future for L Brands. With the popularity of brands, solid balance sheet, and global expansion, Gap has plenty of opportunities for continued growth.
I recommend investors to keep a close eye on all three companies for long-term growth.