by Brian Sozzi
I remember at the height of the stock market's meltdown in September 2008 hearing many opine that luxury goods sales would hold up no matter what (think how silly this sounds in hindsight). In 2009, the debate shifted to whether luxury goods sales were likely to be down on the mat for an extended period, say 10 plus years. Now, the debate has shifted once again.
By most accounts, conspicuous consumption on the part of the well-to-do has roared back. People that had high-paying jobs in 2008, 2009, and in 2010, but were afraid to spend or felt guilty spending on a Louis Vuitton bag while others were financially suffering, are pulling out their credit and debit cards with little hesitance. I have borne witness to the disregard for saving during my various trips to the malls, observing strong traffic in the shoe department at Nordstrom (NYSE:JWN), the use of plastic at the Louis Vuitton shop in Macy's (NYSE:M), and throngs of people browsing the watch counters at department stores.
Aspirational shoppers, those that extracted money from their homes in the midst of the housing boom to buy five pairs of designer jeans and two Dolce & Gabbana handbags, remain on the outside looking into the resurgence. I suspect they will continue to be like a kid with their faces pressed up against the window for a while.
My anecdotal evidence rose to the surface in the recent financial results from LVMH (OTCPK:LVMUY) and Burberry (OTCPK:BURBY). Yes, part of the results from such stalwarts of the luxury goods departments are derived from easier year over comparisons to when demand plain stunk. However, like I always say, a comparison is only easy if conditions in the current quarter are improved. In this case, consumer demand has improved in the U.S. and continues to be at breakneck rate internationally. Traffic is firmer. Pricing is firmer.
So as an investor, is there a way for you to cash in before the slowdown I expect in sales and margin growth in 2011 (resulting from tougher comparisons to 2010 and higher costs for transportation, leather, gold, silver, etc.)? On October 26, Coach Inc. (NYSE:COH) will announce its fiscal 1Q11 financial results. It's my view that Coach will handily beat consensus EPS estimates (consensus: $0.55; WSS: $0.59), estimates that have not budged much since early August in spite of improved traffic to mall-based specialty stores and inventory replenishment at department stores.
Whether Coach raises its FY11 EPS guidance to not only factor in a 1Q11 beat, but also cautious optimism on the holiday quarter, is the million dollar question. I presume Coach will refrain from partaking in the typical retail executive exuberance, though the aforementioned earnings from LVMH and Burberry (in addition to earnings from airlines) hint that the global thirst for luxury goods is alive and kicking. In particular to Coach, I derive at the conclusion that the market may "sell the news" on Coach next week given the stock's three-month rally, which would represent a buying opportunity in my view as investors are likely to see the following in the 1Q11 numbers:
- Nicely positive North American full-price comps on the back of prior year comparison dynamics, scattered signs of firmer pricing in mall shop in shops and online, and better demand.
- Turn in U.S. wholesale sales amid inventory re-stocking (prior year was highlighted by de-stocking).
- Increased importance of China to Coach, where a big push is underway to open stores in FY11 (30 planned).
- Sourcing favorability, supported by Coach's diversified manufacturer base.
Wildcard is Japan, a market that continues to be challenging for retailers and constitutes 20% of Coach's annual revenues.
I am reiterating a Buy recommendation on Coach and hiking the 12-month price target to $52.00 from $48.00. The stock is valued at a P/E multiple of 16.1x my FY11 EPS estimate; though this is above the three-year mean, for a company with a multiple levers at its disposal to drive upside to consensus earnings it's a compelling valuation. Moreover, with growth rates have cooled off at Coach relative to years gone by, I think Coach is open to continuing to loosen its earnings retention rate, mixing in share repurchases with dividend increases. A new share repurchase plan must not be ruled out for FY11.