Companies can make a lot of money servicing all kinds of clients, but those who target the wealthy ones enjoy a special advantage. The rich tend to get richer over time, and this is a considerable plus when it comes to sustaining long term growth. In addition, companies operating in the high end of the pricing spectrum can get away with higher profit margins due to the superior pricing power of their brands. Having a wealthy clientele can be great for business in the long term, and these companies are positioned in the right place to profit from that trend.
Michael Kors is in fashion
Michael Kors (KORS 0.48%) is one of the most successful growth stories in high end fashion over the last few years. The company sells handbags, shoes, watches, jewelry and accessories through three different channels: retail stores, wholesale and licensing agreements.
Kors is an aspirational brand, all kinds of celebrities including famous movie stars walking the red carpet have been portrayed in the media wearing the company´s products. Higher prices generate profitability levels which are remarkably high in comparison to industry averages; Michael Kors has a gross margin above 60% and an operating margin in the area of 30% of revenue.
The business has been booming lately, sales have increased at a 67.4% annually in the last three years and earnings per share have risen by more than 107.5% per year over the same period. And there is no slowdown at sight; revenue grew at a 54.5% year-over-year during the last quarter on the back of a 27.3% increase in comparable-store sales, and earnings per share jumped by a whopping 79.4%.
Management is planning to open 50 new stores during this year in North America, and believes there is potential for 400 locations in the region. When it comes to international markets, the opportunity is still practically untapped; Kors has recently opened its first stores in Brazil and in India, so this trendy fashion company still has plenty of room for growth in the middle and long term.
In the bargain bin
For investors looking for a contrarian bet in the high end fashion, Coach (COH +0.19%) may be the way to go. The company has been feeling the pressure from increased competition lately, and weak sales in North America have been a recurrent problem for Coach over the last quarter as the company is clearly being hurt by Michael Kors´s success.
Sales in North America increased by 6% during the last quarter, direct sales were 5% higher, but comparable store sales fell 1.7% versus the previous year. The company did not provide sales guidance for the rest of the year, but Wall Street analysts have a generally negative tone on the company and its prospects for the next quarter.
On the other hand, Coach is doing much better on the international front. International sales increased by 7% in U.S. Dollars and 17% on a constant currency basis during the quarter. China results were particularly encouraging with total sales growing 35% and comparable-store sales rising at a double-digit rate.
Coach´s new head creative director Stuart Vevers is working on reinvigorating the company´s image and turning Coach into a full lifestyle brand. If the company succeeds in improving its performance in the U.S., the stock holds considerable upside potential form currently depressed valuation levels.
Coach trades at a P/E ratio below 15 versus a ratio of more than 32 for its high growth competitor Michael Kors. Michael Kors deserves a premium due to its superior growth potential and better financial performance, but Coach could provide some substantial gains if management implements a successful turnaround.
Tiffany shines
Tiffany (TIF +0.00%) needs no introduction when it comes to consumers, the company owns which is arguably the most recognizable brand in high end jewelry, and the little blue box means a differentiated product with its correspondingly higher prices.
But investors may want to keep in mind what this means for the company financially. According to RetailSails, Tiffany is in the second position behind Apple in the U.S retail industry in terms of sales per square foot. By the way, it's not by chance that other high end companies like Coach and Michael Kors come in fourth and fifth position respectively.
Tiffany´s brand image, retail locations, selections and design generate above average profitability for shareholders. While undifferentiated jewelry retailers need to purchase from wholesalers and compete in price, which puts a lot of pressure on margins, Tiffany´s pricing power allows the company to generate gross margins in the area of 57% of sales.
The company has been facing some headwinds due to weak consumer spending lately, but in the last quarter Tiffany regained some luster as it reported better than expected financial figures and management raised its guidance for the rest of the year.
Worldwide net sales rose 4% to $926 million. On a constant-exchange-rate basis worldwide net sales increased by 8%, and comparable store sales rose 5% due to growth in most regions. Earnings per share grew 16% to $0.83 versus an average estimate of $0.73 per share by Wall Street analysts.
Tiffany trades at a P/E ratio around 22.8, which is in line with historical averages for the company. According to Morningstar, the average P/E ratio for Tiffany over the last five years has been 21.4, so investors are getting a fair price for this distinguished jewelry retailer.
Bottom line
The rich get richer, and investing in the companies that cater the wealthy can make you richer too. Michael Kors is the high growth opportunity in the sector, Coach is a contrarian bet and Tiffany is a high quality company trading at a reasonable valuation.
