According to a recent report by Credit Suisse, global wealth reached an all time high of $241 trillion in 2013 – almost double what it was in 2000. The firm estimates that global wealth can reach $334 trillion by 2018, which is a spectacular 40% growth from the current levels. So, if affluent individuals attain more wealth to spend, the luxury goods segment will be the prime beneficiary.
Bain and Company agrees with this rationale. The research firm estimates that revenues from the sale of luxury goods can grow by about 6% annually through 2015 -- almost twice the global GDP growth rate. These estimates present a bullish case for the luxury goods segment, and high-end retailers like Tiffany (NYSE:TIF), Michael Kors (NYSE:CPRI), and Ralph Lauren (NYSE:RL) stand to benefit over the long run.
A glittering gem
According to a recent survey by the Luxury Institute, Tiffany & Company is the most-purchased premium jewelry brand by the affluent women in the U.S. The jeweler has a geographical presence in 22 countries through its 277 company-operated stores.
Tiffany has been growing at a fantastic rate lately. Over the last 27 months, its operating and free cash flows have grown by about 165% and 927%, respectively, while its shares have almost doubled in value. And the jeweler can still grow further. Tiffany plans to open 14 new stores by the end of 2013, which is a healthy net store addition of 5%.
Speaking of organic growth, the jeweler is gradually shifting its focus from low-price point offerings (silver jewelry) to high price-point offerings (diamond jewelry). Diamond jewelry is usually more expensive and fetches greater margins, as opposed to gold and silver jewelry. So, we can expect an increase in Tiffany's margins over the longer run. But that's not all.
Tiffany's comparable sales have already risen by 18.8% over the last 2 years, and the growth can continue with its gradual shift toward high price-point jewelry. Additionally, diamond prices are relatively stable as opposed to silver's volatile pricing history, which reduces Tiffany's risk exposure. And lastly, with a wider range of diamond offerings, Tiffany will attract more affluent individuals. This will allow the jeweler to benefit from the rising global wealth.
A shiny suit
Another beneficiary is Michael Kors (NYSE:CPRI). The company designs and manufactures premium apparel for men and women, which are later sold in its 328 stores located across North America, Europe and Asia. And according to the Luxury Institute, Michael Kors is the most widely-purchased premium apparel brand by affluent women in the U.S.
Michael Kors has also been growing at a spectacular rate. Since its IPO in 2011, its operating and free cash flows have surged by about 297% and 298%, respectively. Furthermore, its comparable sales surged by a staggering 45% in its recent quarter alone. Justifying this spectacular growth, shares of Michael Kors have more than doubled since its IPO. But despite its recent rally, there seems to be ample room for further growth.
Michael Kors aims to increase its international store count to 700 over the longer run – almost double from its current store count. This seems like a realistic goal, as the company operates with little or no debt. Moreover, its healthy gross margin of 60.3% highlights its strong profitability. And its $639 million worth of liquid positions indicates that the company is financially capable to fund its expansions over the short-medium term.
Moving on, Michael Kors' recent entry into the Indian and Brazilian markets is another positive. These emerging nations are some of the fastest growing mature economies in the world. So, global retailers are scrambling to enter these nations, before the maturing markets and inflationary pressures act as an entry barrier. Naturally, by expanding its reach in the emerging world, Michael Kors is opening up new growth avenues for itself.
Another apparel brand
When we talk about premium apparel brands, it's hard to overlook Ralph Lauren. The apparel company dominates a market cap in excess of $16 billion with a moderate price to earnings ratio of 18 times. And by operating with little or no debt, Ralph Lauren sports a clean balance sheet. And despite the pessimism surrounding the company, I believe that it has plenty of upside to offer.
Ralph Lauren's decline in its comparable sales over the last two quarters has been been concerning many investors. But despite this decline, Ralph Lauren posted a modest consolidated revenue growth of 4% during its recent quarter. This was made possible by strong growth in its e-commerce sales. Its online portal has been sharing the workload of its brick-and-mortar stores, and offsetting the decline in its comparable sales growth.
Affluent individuals looking to purchase luxury goods usually visit physical stores to closely examine the quality of their high value purchases. However, the strong growth in Ralph Lauren's e-commerce sales indicates that its customers are confident about the quality of products delivered. This highlights its brand loyalty and trustworthiness.
If the trend continues and its e-commerce portal continues to record strong growth, Ralph Lauren can consider closing some of its redundant brick-and-mortar stores. This can save operating costs, boost profits and yield more returns over the longer run. And with its gradually maturing e-commerce store, Ralph Lauren can reach new regions. This can save the cost and time required to setup brick-and-mortar stores.
Luxury goods segment is growing rapidly, providing these companies an industry-wide advantage. However, well-established businesses with internal growth triggers like those above stand to benefit the most. Thus, investors might want to take a closer look at Ralph Lauren, Michael Kors, and Tiffany with a medium/long term view.