Luxury products are said to do well, even during harsh economic times. If you own stocks of luxury companies that means your investment will more likely appreciate in value, or it may not decline as much as other industries during a recession. Luxury brands appeal to most consumers because of the superior quality of products, glamour, and celebrity endorsements, which make them irresistible. The following is an analysis of three stocks with the above characteristics that are ready to soar as luxury demand rebounds. I believe that now is the time to strongly consider acquiring these stocks, and I will explain this below:
Michael Kors Holdings Ltd (KORS): Michael Kors Holdings is a recent IPO, which went public in December 2011. The stock has a market cap of $8 billion and is currently trading around its new high of $44.97.
At the beginning of February the stock rose about 25% after announcing strong third quarter results.
Revenue during the last four years has increased at a compound annual growth rate of 26.47% while income has increased at a compound annual growth rate of 4.80% during the same period.
Kors Holdings is spending a lot of cash on social media to boost brand awareness. As a result, Michael Kors is the second largest designer followed on Twitter. In addition, they expect to have 1 million fans on Facebook by June 2012. The company is quickly expanding in Europe and Asia as it has already signed 85-90% of the leases for 2013 in addition to seven airport boutiques lined up to open this year.
Earnings per share (TTM) came in at $0.52 compared to $6.85 for competitor Ralph Lauren (RL). Price to earnings ratio of 81.25 for Kors is almost three times higher than Ralph Lauren; a good indication the market expects high growth and expansion for Kors Holdings. I also think the stock will appreciate in value because revenue will continue to increase as management continues to tap into new markets in Europe and Asia. The core customer for the Kors brand is the 30 to 40 year old category and their second biggest is the 18 to 25. Big volume handbags for the luxury brand are in the price range of $348 and $398.
Most recently, hedge fund billionaire Steven Cohen acquired 1.3 million shares of Kors Holdings in the fourth quarter of 2011 for his hedge fund, SAC Capital Advisors. I think the strong bullish momentum for this newly publicly traded company will continue, which will reflect in an appreciation of value in the stock.
Saks Inc (SKS): Saks is currently trading a couple of dollars below its 52-week high of $12.97. It has a market cap of $1.67 billion and pays no dividend as of yet.
Sales and income for the luxury fashion retailer increased 5.90% and 182.20%, respectively during the last twelve months. Revenue for the last four years decreased at a compound annual growth rate of 3.69% while income has increased at a compound annual growth rate of 2.19% during the same time period. Earnings per share came in at $0.40, compared to the industry's average of $0.32. It has a price to earnings ratio of 26.89; the stock is not cheap when compared to a price to earnings ratio of 22.43 for the industry. However, it can also mean that investors are willing to pay a higher price for the stock since they expect higher growth, better revenues and an appreciation in value of the stock.
From a technical perspective, the stock has not fully recovered after tumbling down during the recession. I think it will take a slow process, however this may be a good time to buy as the stock is destined to rebound with increasing revenues, better cash flow, and a higher consumer confidence that will drive more high-end consumer into their stores to buy luxury apparel and accessories.
Tiffany & Co. (TIF): Tiffany & Co. issues an annual dividend of $1.16, has a yield of $1.80 and a payout ratio of 31%. Tiffany has a market cap of $8.35 billion. TIF closed at $66.28 on Friday.
During the last twelve months sales and income increased 13.90% and 38.70%, respectively. Revenue during the last four years has increased at a compound annual growth rate of 1.32% while income has increased at a compound annual growth rate of 3.30% during the same time period. Earnings per share came in at $3.43, higher than the industry's average of $3.14. Its price to earnings ratio of 19.21 is also higher than the industry's average of 11.11. In addition, management is doing well with margins because they are higher than the industry. For example, gross margin and operating margin are 59.18% and 21.09%, respectively while the industry has gross margins of 38.00% and operating margins of 6.79%.
The five-year expected price to earnings to growth (PEG) ratio for Tiffany is 1.18, which makes the stock expensive since generally, a fairly priced security will have a PEG equal to 1. Also, it can indicate that investors' sentiment towards the growth of the stock is very optimistic; hence, they don't mind paying a premium price because they know they will be compensated handsomely when the stock appreciates in value in the future.
The stock has been reaching new highs since the beginning of 2009, thus I believe this trend will continue, supported by higher revenue and earnings, stronger cash flow, and an overall healthier economy that entices consumers to purchase luxury goods without causing a major detriment to their wallets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.