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How to Trade the Global Luxury Market Today

Tamara Rutter
September 13, 2012

Luxury retail stocks got a beating earlier this week following Burberry's announcement that it would cut its full-year profit outlook. The London-based fashion house blamed weakness in the luxury goods sector for a possible shortfall in sales. Other global luxury stocks traded down on the news, including Richemont, Christian Dior, and Louis Vuitton Moet Hennessy. Meanwhile, luxury brands on this side of the pond couldn't catch a break either.

Shares of Tiffany (NYSE: TIF  ) slid 1.4% along with Coach (NYSE: COH  ) , which fell 2.5% in midday trading. However, Ralph Lauren was the biggest loser, slipping as much as 3.5% early Tuesday morning. But before we run screaming from high-end retailers as a whole, let's dig into the individual figures and see if we can find some hidden winners among the group.

Retail therapy
A closer look at other European premium-goods businesses reveals that this may be a Burberry-specific problem. Consider this: Hermes International reported a 28% spike in profit for the first half of the year. Moreover, the French company "raised this year's sales-growth target after earnings beat estimates on Asian demand for luxury products," according to Bloomberg. Similarly, Italian design house Salvatore Ferragamo posted double-digit profit growth for its most recent quarter.

Even U.S. brand-name retailers are putting up promising numbers, despite a so-called slowdown in luxury spending. Coach wrapped up fiscal 2012 in style with diluted earnings climbing 21%, and revenue up 15% at $4.7 billion for the year. One factor that likely contributed to this is that, unlike Burberry, Coach kept customers pouring through its doors by lowering prices.

On the other hand, during a visit to Miami in May, I couldn't believe the outrageous prices in Burberry's outlet store at Sawgrass Mills. I was shocked to find that a simple 5x7 picture frame in the company's factory location cost a whopping $185. Less surprising was the fact that hardly anyone was in the store, as most outlet shoppers were next door lining up in front of the Coach outlet.

Balancing act
Striking a balance between discount and full-price inventory is critical for high-end retailers, whose brand image depends on it. Just ask Saks Fifth Avenue. The once upscale department store forever tarnished its over-the-top brand reputation after it began wildly discounting merchandise in 2008, during the wake of the Great Recession.

Yet other designer firms have flourished in this regard. Look at Michael Kors (NYSE: KORS  ) , for example. The accessories powerhouse has been on a roll since its initial public offering last year, with shares up more than 95% year to date.

Similar to Coach, the namesake company has become a fashion sensation by offering affordable designer goods. In fact, the company's Michael line, which offers a selection of lower-priced apparel, has been a runaway success for the design house -- supplying around 90% of its total revenue.

Kors has also enjoyed a nice run thanks to its popular collection of chronograph watches and other accessories. Talk about the power of branding: The company actually buys the watches from Fossil (Nasdaq: FOSL  ) and later rebrands them to sell under the Michael Kors name.

Fossil is