Where Is the Best Opportunity in the High-End Luxury Space?

Despite the market's loss on Thursday, both Tiffany (NYSE: TIF  ) and Coach (NYSE: COH  ) are trading higher behind bullish coverage from Cantor Fitzgerald. According to the analyst firm, both stocks are good investment opportunities within the luxury space. However, are there even better opportunities?

What's the call?
In regards to the handbag maker Coach, valuation and the hope of a turnaround are the reasons for the bullish call. The analyst notes improved North American trends, the company's buyback program, and a dividend yield of nearly 2.5% as all reasons to buy Coach.

Tiffany is not a turnaround stock, but rather a strong and well-established company. During the company's last quarter , revenue grew 4.4% year over year as it continues to steal market share from competitors. According to Cantor, Tiffany can steal even more share, thus making it worthy of its premium valuation.

Questionable upside
In retrospect, price targets of $66 and $88, respectively, for Coach and Tiffany do not represent massive gains from this point forward. The target represents upside of 20% for Coach and 14% for Tiffany. However, if you're looking for a good investment in the luxury space, these two names might not be the best option.

For one, Coach is a company with declining comparable store sales. Sure, it is cheap at 15 times earnings, but if there's one thing we know about the luxury space it's that buyers are trendy. Once a brand is no longer in demand, it is hard to make a comeback.

For Tiffany, it is the high-end jewelry leader, but with a lot of competition, there are large-scale concerns regarding its ability to grow further. Moreover, Tiffany has long been the center of acquisition rumors, but with many of those rumors dying, there is reason to believe investors might not find its stock as appealing.

Instead, Michael Kors (NYSE: KORS  ) and even Restoration Hardware (NYSE: RH  ) might be more attractive in the luxury space. Kors is the direct competitor of Coach in the handbag/wallet space, but Restoration Hardware might be an odd selection. After all, Restoration Hardware is an upscale home-improvement company.

While customers may be purchasing tables instead of handbags, Restoration Hardware is a company with products aimed directly at the high-end market. This targeted consumer has allowed Restoration to produce growth that trumps anything we've seen in the home-improvement space.

In 2013, the stock has gained 90%, but is down 14% over the last three months. Much of this loss came after the company's most-recent quarter, in which the company produced revenue growth of 30% year over year. More importantly, comparable sales increased 26%, which is outstanding. As a result, the company's net income grew 62%, indicating margin expansion.

In regards to valuation, the company is trading at 30 times next year's earnings and 1.85-times sales. In comparison, Lumber Liquidators trades at 3.2-times sales, making it significantly more expensive, yet Restoration is growing much faster. For analysis of both Restoration's last quarter and its valuation click here.

Speaking of growth, Kors grew its top line by a whopping 54.5% in its most-recent quarter. In addition, its bottom line increased 82%. The company continues to grow with new products, while driving new consumers to its stores as evidenced by some impressive same-store-sales growth.

Considering its growth, Kors is not an expensive stock. It trades at 33.5 times earnings, which is twice the price of Coach. However, when given the choice to invest in a company with zero same-store growth or 20% comp improvement, most investors would see Kors as cheap despite the price.

Final thoughts
Personally, when I'm investing in high-end retailers, I don't want 0% to 4% sales growth with pressured margins. I want rapid sales growth, increasing margins, and a higher number of consumers flocking to a particular store. With Tiffany, the company is seeing comparable store growth, and its margins have expanded nicely. However, it isn't able to drive its top line.

With all things considered, Kors and Restoration Hardware are two different companies, but are attracting and keeping new consumers at an impressive rate. It is this growth that makes both companies attractive. And while I don't necessarily disagree with Cantor's calls, the combination of value and growth in shares of Kors and Restoration Hardware is unparalleled, thus making both great selections in the high-end space.

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