Luxury stocks aren't recession-proof, but they often hold up well during economic downturns thanks to the spending power of higher-income customers. As a result, some investors consider luxury stocks to be defensive investments. Let's discuss three types of luxury stocks investors should watch, and which ones belong in your portfolio.

The bellwether stock: LVMH
Top-tier luxury player LVMH Moet Hennessy Louis Vuitton (NASDAQOTH:LVMUY), which owns a massive portfolio of premium brands, is an excellent bellwether stock for the high-end luxury market .

Image

Source: Louis Vuitton.

LVMH's fashion and leather goods segment sells flagship brands such as Louis Vuitton, Fendi, Givenchy, Kenzo, and Loewe. Its watches and jewelry segment includes TAG Heuer, Bulgari, and Hublot. The perfume group makes Dior and Guerlain fragrances, and the wine and spirits group sells Hennessy cognac, Glenmorangie, and Belvedere.

LVMH also has a selective retailing group, which consists of luxury travel retailer DFS, Sephora stores, special department stores, and cruise lines. Last quarter, all five businesses posted healthy top-line growth.

 

Percentage of revenue

Annual growth

Fashion and leather

36%

13%

Watches and jewelry

9%

19%

Perfumes and cosmetics

13%

16%

Wine and spirits

12%

12%

Selective retailing

32%

20%

Source: Q1 quarterly report.

Over the past three years, LVMH's gross margin has remained between 65% to 66%, while its annual net profit during that period jumped 56%.

The affordable luxury players: Coach and Michael Kors
Moving further down market, we see "affordable luxury" players such as Coach (NYSE:TPR) and Michael Kors (NYSE:KORS), which sell purses and clothing that cost hundreds of dollars instead of thousands.

These stocks are riskier bets than LVMH for two reasons. First, they depend heavily on middle-class consumers, who are often hit harder by economic downturns than more affluent customers. Second, both Coach and Kors sell their cheapest items at outlets and department stores, which weakens their appeal as premium brands and can trap them in a vicious cycle of lowering prices to boost sales.

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Source: Coach.

Last quarter, Coach's revenue fell 15% annually, net income plummeted 48%, and operating margin contracted from 24% in the prior-year quarter to 16%. Sales fell 24% in North America and 3% globally.

Kors fared better last quarter, with 18% annual revenue growth and a 13% spike in net income. Unfortunately, Kors reported a 5.8% decline in comparable-store sales (excluding currency impacts) in North America, compared to analyst expectations for a 3% gain, indicating the momentum the brand gained from Project Runway was quickly running out.

Shares of Coach and Kors have respectively tumbled 5% and 40% since the beginning of the year, compared to a 10% gain for LVMH's ADR shares.

Behind-the-scenes players: Luxottica and Inter Parfums
Last but not least, let's discuss two "hidden" players in the luxury sector: eyewear maker Luxottica (NYSE:LUX) and perfume company Inter Parfums (NASDAQ:IPAR).

Luxottica, which owns Oakley and Ray-Ban, manufactures a wide variety of licensed brands, including Chanel, Burberry, Armani, and Bulgari. Since a pair of Chanel sunglasses costs considerably less than one of its handbags, Luxottica's licensed brands comfortably straddle the high-end and affordable luxury markets. Demand has been healthy -- sales rose 22% annually last quarter as net income improved by 34%.

Inter Parfums makes licensed perfumes for high-end brands such as Lanvin, Boucheron, Jimmy Choo, Montblanc, and Anna Sui. Since fragrances are cheaper than eyewear, they can appeal to low-end customers looking for a taste of affordable luxury.

However, Inter Parfums has been weighed down by its heavy exposure to the tumultuous European market, which accounted for 79% of its top line last quarter. Last quarter, its European sales plunged 15% annually, although U.S. sales -- which account for the remainder of its revenue -- rose 16%. Despite this uneven sales growth, Inter Parfums' net income rose 12%, thanks to an improved operating margin.

A few things to consider
When investing in the luxury goods market, it's important to consider a few things.

First, high-end brands like Louis Vuitton generally won't lower their prices to appeal to less-affluent consumers. Midrange players like Coach and Michael Kors will, but it's a slippery slope that could tarnish their brand appeal. Lastly, be aware that hidden players, like Luxottica and Inter Parfums, can profit by straddling multiple price tiers.

 

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach and Michael Kors Holdings. 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.