This One Company Is the Best Play on Global Luxury Growth

The global luxury market is growing, in particular accessories and emerging markets.One company that is your best choice to capitalize on such growth.

Jun 16, 2014 at 10:00AM

Kate Spade Singapore Logo

Source: Kate Spade

The global luxury goods market is estimated to grow at 6% annually to between $320 billion and $333 billion in 2015, according to research from Bain. This growth isn't equally shared among all product segments and geographies, however, with accessories and emerging markets taking the spotlight. This makes Kate Spade (NYSE:KATE), a global designer and marketer of accessories and apparel, a potential investment candidate for those who want to profit from the growth in the global luxury market.

Other consumer companies such as SodaStream (NASDAQ:SODA) and Sequential Brands (NASDAQ:SQBG) also offer interesting insights into Kate Spade's business model.

Attractive accessories business
Based on Bain research, accessories became the fastest growing segment in 2013, expanding by 4% to become the largest luxury product category at 28% of global revenues. Kate Spade derived 80% of its revenues from accessories in 2013 and expects to maintain the ratio at 70% in 2016 even as it expands into other luxury product categories going forward.

The accessories market doesn't just boast strong growth potential; it's also a high-margin business. Kate Spade's focus on accessories has been a key factor in its ability to maintain gross margins in excess of 50% over the past three years. There are two key reasons why Kate Spade's accessory-buying customers are relatively less price-sensitive.

Firstly, accessories such as handbags and small leather goods tend to complement a wearer's core apparel like dresses and footwear. As a result, they have broader appeal and suffer less from fashion and seasonality risk. For example, consumers are generally reluctant to pay a huge price premium for apparel that will go out of fashion in the next three months. In contrast, they are relatively more comfortable with paying up for accessories that can be used to match with multiple apparel products and have a longer life cycle.

Secondly, accessories are usually follow-on purchases at smaller ticket sizes compared to apparel purchases. Consumers tend to go bargain-hunting for the best deal in their initial purchases of apparel products, and therefore they are more price-conscious. Once they buy their favorite dresses and shoes, it drives the need for matching accessories.    

SodaStream, another consumer company in a different space, benefits from similar dynamics in relation to customer price sensitivity. While consumers won't blink paying a few bucks for a cup of latte, they will definitely consider more carefully when it comes to purchasing homemade soda makers from SodaStream.

SodaStream understand consumer psychology very well. It prices its soda makers at as low as $100 and makes the bulk of its profit margins on consumables. Once a customer has bought a SodaStream sodamaker, he is basically "locked in" and more likely to buy things like carbon dioxide refills and flavors without much concern over price. The results speak for themselves, with SodaStream also achieving high gross margins over 50%, like Kate Spade.

International expansion
Bain's 2013 "Luxury Goods Worldwide Market Study" indicated that Greater China, Southeast Asia, and the Middle East are the fastest-growing luxury markets in the world. Kate Spade derived 80% and 17% of its revenues from North America and Asia respectively, implying room for further growth.

Overseas expansion is fraught with both opportunities and risks. It's reassuring to know that Kate Spade has employed a range of business models to manage risk when it comes to overseas expansion in the different regions. For the markets which it perceives that operating and political risks are lower such as Europe, Japan, and Southeast Asia, Kate Spade has chosen to operate its own stores locally.

On the other hand, Kate Spade is expanding into "high business risk" regions such as Middle East, Mexico, and Turkey via distribution agreements. In cases where local knowledge is vital, Kate Spade has partnered with local companies such as in its joint venture arrangements in China. Looking ahead, Kate Spade has plans for approximately 55 new company- and partner-operated international stores this year.

Kate Spade Original

Source: Kate Spade

Asset-light model
In addition to capitalizing on the growth in accessories and emerging markets, Kate Spade's capital-light business model is another reason for its attractiveness as an investment candidate. While there are other companies capitalizing on the growth of the luxury market, they have higher risks because of the capital-intensive nature of their businesses. Manufacturers have their capital tied up in facilities and equipment, while brick & mortar retailers face rising rental costs.

Kate Spade mitigates these concerns with its asset-light operating model. Kate Spade doesn't own or run any manufacturing facilities, it sources its products from more than 100 suppliers globally. It is also very advanced in terms of e-commerce penetration, generating about a fifth of its revenues from online sales. With only 12 existing license arrangements in place, there is huge potential for Kate Spade to grow this asset-light revenue stream.

To gauge the potential of growing licensing revenues, it's worth drawing insights from Sequential Brands, a pure-play brand management company that owns and licenses eight consumer brands. Two years ago, Sequential Brands engaged in wholesaling and retailing prior to its transition into a pure licensor.

In this short two-year period, it increased the number of brands licensed from two to eight and saw its retail sales contribution from brands under management grow from below $100 million to close to $1 billion. More importantly, Sequential Brands' licensing model suggests that it doesn't have to incur costs with respect to sourcing, manufacturing, and distribution. This enabled it to generate high trailing twelve month operating margins of 44%.

Looking into the future, Kate Spade sees $100-$150 million worth of retail equivalent sales from licensing in the next three years. It will license its brands for table linens and home décor products this year and next year respectively.

Foolish final thoughts
Kate Spade's strong first quarter of 2014 results validates my confidence in its strong growth prospects. It grew its quarterly net sales by 43% to $224 million and more than doubled its EBITDA to $17 million. Kate Spade's 2014 priorities include increased product licensing opportunities and expansion of its e-commerce operations, which should position the company to further benefit from the luxury market's growth.

Will this stock be your next multi-bagger?
The best way to locate a multi-bagger to find a growing market. The luxury market boasts tremendous potential and Kate Spade is the best proxy for industry growth. Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends SodaStream. The Motley Fool owns shares of SodaStream. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers