Retail Sector Rebounds (Part II): All That Glitters

Last Tuesday I began a series on the retail sector starting with footwear. Now shoes may be a woman’s passion, but diamonds are definitely a girl’s best friend. In honor of Harry Winston’s stock breaking out Monday, it’s only fitting that we break out our loupes and examine the bling space, especially considering that the holiday season is rapidly approaching.

Actually, there’s not much to write about since many of the major players–Cartier, Bulgari, and Van Cleef & Arpel–are either privately owned or are divisions of large conglomerates. The priciest publicly traded companies are Harry Winston (HWD) and Tiffany’s (TIF) followed by the online diamond retailer Blue Nile (NILE). Rounding out the group are chain retailers Zale (ZLC) and Signet (SIG) (which owns Kay’s and Jared), Chinese jewelers Fuqi (FUQI) and LJ Int’l (JADE), and watch and accessory makers Fossil (FOSL) and Movado (MOV).

It’s not fair to compare Fossil with Harry Winston since it’s like comparing apples to skyscrapers, so I thought I’d compare the ones that I’ve paired above with each other.

Harry Winston (HWD), Tiffany (TIF), & Blue Nile (NILE): These stocks suffered the brunt of the economic bad news and were grossly oversold. Although they’re trading well off their lows, they still have a lot of room to run, especially Harry Winston. Monday, this stock broke out of its month long base on heavy volume. There’s minor resistance at $15 and major resistance in the $23-$24 range.

As for Tiffany, the stock broke out October 6th on an analyst upgrade. It’s currently looking to push past its next resistance around $43 towards its all-time high of $57. Tiffany is the only company in this group that pays a quarterly dividend (D/Y = 1.7%), and it’s been raising it consistently since 2000 which is a cause to celebrate.

Blue Nile is the other luxury jeweler. It doesn’t own any bricks and mortar stores; it’s presence is strictly online. The stock has been range bound for the past month channeling between $60 and $63. A break above the high point on decent volume would be the signal to take a long position. Next resistance at $73-$74.

Zale (ZLC) and Signet (SIG): It’s been a bumpy ride for Zale since recovering from a buck a share in March. It hit $8 briefly last month and if it can break through that again–as it’s threatening to do–I’d jump in.

It’s been smoother sailing for Signet but it’ll be rough seas for the stock if it can’t clear $30. It’s $2 shy of that now. I’d wait until it clears $30 or bounces off of $25 before buying.

LJ Int’l (JADE) & Fuqi (FUQI): JADE put in an island reversal last week zooming up almost a dollar after an analyst upgrade. The company recently raised third quarter revenue guidance which prompted the upgrade along with a price target of $6.75. In a detailed letter to shareholders, the CEO outlined the company’s expansion plans further into the Chinese market. This type of personal attention to shareholders is something that Warren Buffett is famous for and I’m glad to see it being emulated elsewhere, but for the stock to make it to the analyst’s price target, it’s going to have to clear the $4 mark which in the past has been a level of heavy resistance/support.

Fuqi is in the habit of blowing out earnings estimates. Of course, it’s only reported earnings four times but that’s still nothing to sneeze at. The company raised Q3 guidance to 44 cents per share, up from 31 cents the previous quarter as well as raising full-year guidance. Although the stock has fallen from its incredible run-up ($3 to $30), many feel it’s still undervalued, including Zack’s which recently added it to its buy list. An analyst quoted in a recent article in BusinessWeek also believes the stock is undervalued giving $52 as a 12 month price target citing a strong balance sheet, a dedicated management team, and a growing Chinese middle-class as the engines for growth.

Fossil (FOSL) & Movado (MOV): Time has not been on the side of watchmakers. Both companies beat second quarter estimates but only Fossil raised full-year guidance.

An analyst upgraded Movado in September with a $16 price target saying that lower inventories could spur second half growth. On the other hand, others feel that lower inventories could also translate into lower sales unless the right products are stocked.

Not to be left alone, Fossil was also upgraded with a $32 price target. The analyst said that the company is branching out into licensing and other accessories that will spur growth.

Although both stocks are up three-fold since March, both are bumping up against major resistance–for Fossil it’s $30 and $15 for Movado. I’d wait for these levels to be broken before considering a long position.

Here’s a summary of the stocks mentioned in the article:

Click to enlarge

Comments

[Joseph L. S...:]

Ron Baron of Baron Funds is a big booster of Blue Nile, as well.

I may be a hopeless throwback, but the image of a nervous young man trying to determine the most beautiful way to ask his girl to marry him or the young couple slowly deciding together which diamonds to ask the jeweler to bring out from the case and trying them on herself is a timeless one.

All things do not yield to online purchases. "Look, honey, I saved 20% on this symbol of my love!" may or may not be the rock-solid foundation of a clever business plan it seems at first...

Oct 21 09:53 AM

[tripleblack:]

Yes, I agree. I was recently trying to explain the difference between the effect of downloadable music and movies vs books.

In the case of movies and music, the old culture of dating and buying tickets to attend movies and concerts supports part of the infrastructure costs.

Books have no such cultural prop, and are therefore more vulnerable than the other 2 media.


On Oct 21 09:53 AM Joseph L. Shaefer wrote:

> Ron Baron of Baron Funds is a big booster of Blue Nile, as well.
>
>
> I may be a hopeless throwback, but the image of a nervous young man
> trying to determine the most beautiful way to ask his girl to marry
> him or the young couple slowly deciding together which diamonds to
> ask the jeweler to bring out from the case and trying them on herself
> is a timeless one.
>
> All things do not yield to online purchases. "Look, honey, I saved
> 20% on this symbol of my love!" may or may not be the rock-solid
> foundation of a clever business plan it seems at first...

Oct 21 12:23 PM

[capital pains:]

Excuse me but is the author in a time warp ? Harry Winston - "minor resistance at $15 and major at $23-$24" HWD hasn't seen either of those levels since the bubble, or shall we say bauble burst.
If you're going to supposedly contribute, kindly get your facts straight. You just might want to look at a HWD 6 months chart before you expound. Do you think ?

Oct 22 08:04 AM

[Joe Friday:]

Odd that you would suggest that Fossil's p/e was a little rich at 17, but fail to mention that Nile is trading at a p/e of 92.

In general your "analysis", is exceedingly simplistic.

Oct 22 04:41 PM

[Knowspeech:]

Clearly the author (Dr Kris) is clueless about the fundamentals of the luxury business. Also, comparing Tiffany, Harry Winston and Blue Nile business doesn

Oct 26 02:17 PM

[Knowspeech:]

Clearly the author (Dr Kris) is clueless about the fundamentals of the luxury business. Also, comparing Tiffany, Harry Winston and Blue Nile business doesn't make sense.
Btw, Tiffany sells for the most part silver jewelry, Harry Winston is not only a retail business as a large portion of it business is B2B via it's mining business, and blue nile is an online retailer which do not own its stock of products (just a middle man) and sell unbranded diamonds like a market place.
I would add that the author does not also take in consideration the fundamentals of the luxury goods business. Aside from China, the luxury goods business is in dead water. If I were you I would not follow any recommendation from the author. Her analysis is absurd.

Oct 26 02:18 PM