Luxury luggage company Tumi (NYSE:TUMI) is coming up on its one-year IPO anniversary. In typical hot-IPO fashion, the stock came out priced like its $3,000 duffel bag, and even with solid results, it has struggled to move meaningfully in either direction. Part of this was due to insider selling, including much of Doughty Hanson's 60% stake, but it was mainly a case of sky-high valuation. Now, sailing into year two as a reemerged public company, it delivered lackluster results that sent investors and analysts on a bear run -- dragging the stock down 10 points with them. But with renewed interest in luxury goods consolidation and a favorable market, are Tumi's shares on sale?
A troubled start
Tumi sells a very well-made product that sets itself apart from the competition and commands prices seen only in the upper echelons of the luggage world. While a Samsonite is good enough for most of us, Tumi offers exclusivity and craftsmanship to those with thousands to spend on a roller suitcase.
As mentioned above, the company came out on the public markets last year, when other high-fashion accessory companies such as Michael Kors (NYSE:CPRI) were mopping the floors with tremendous sales figures and rocket-ship stock prices. Tumi hasn't had such luck, unfortunately, with the stock down nearly 12% since its market debut.
This week, the company delivered its fourth-quarter and year-end earnings, and the Street was not satisfied. Tumi earned $0.25 per share for the quarter, missing estimates by $0.01. Top-line sales came in at $126.8 million, a near 19% gain over the prior year’s numbers, but still short of Street expectations of $128.58 million. To finish the triumvirate of disappointment, the company delivered guidance that fell short of Street expectations. Tumi management expects this year's EPS to come in between $0.82 and $0.86, short of the $0.88 analyst consensus.
Now, missing Street expectations can mean very little in the long term, and even create short-term buying opportunities if the underlying value is superior. The luxury goods market is still expected to grow in the double digits, driven by Asian sales, and there is even talk of consolidation among brands. Does this bode well for the recently price-slashed Tumi?
You haven't seen many value investors circling the high-fashion brands in the last couple of years. Michael Kors, a company that is without doubt growing at incredible rates and capitalizing well on its Asian expansion, has a trailing EBITDA that trades at nearly 18 times its enterprise value. Even though it's actually at a discount to ratios a few months back, that is still a hefty premium to pay.
If Tumi comes in at the high end of its guidance, $0.86 per share in full-year 2013 earnings, that implies a P/E of 24.7 times -- still a far cry from anything close to value-oriented. Of course, a stock doesn't have to trade dirt cheap to be a winner for your portfolio.
In a recent interview with The Wall Street Transcript, investment advisor Warren Barnett said he believes the recently out-of-favor luxury goods industry is prime for consolidation. Companies like Tumi, Tiffany (NYSE:TIF), and Coach (NYSE:TPR) have had a difficult time meeting expectations, even if, like Tumi, sales are growing in the double digits year over year. Barnett points out that these companies typically have a high return on capital and strong margins.
The biggies in the business, such as Moet Hennessy Louis Vuitton, are luxury conglomerates capable of swallowing whole a Tumi, Tiffany, or Coach. The future growth of all these players lies in the East, and MHLV has fantastic exposure in the region and could leverage this for any potential acquisition. More important for MHLV, these companies (with the exception of recent entrant Tumi) are all trading at discounts to their historical P/Es. Tiffany has a forward ratio of just over 19 times, yet if you look at its historical ratios, the company spent most of 2010 through mid-year 2012 trading at ratios in the mid-20s. If the company can even modestly improve sales and achieve favor with the Street, we could see a return to a 25 times to 26 times multiple.
Foolish bottom line
Is there an acquisition on the table? It's mere speculation until we hear anything concrete, but this year has started off as a big one for M&A, and the current market is encouraging even more deals to come.
For now, though, Tumi remains an expensive stock without the track record to justify higher expected multiples. Investors ought to wait and see subsequent earnings reports for any improvements on the horizon.