How To Get A Piece Of The Increased Spending On Luxury Fashion

Includes: COH, KORS, LVMUY
by: Kyan Alexander

Social status historically has caused jealousy between strangers and friends alike. Historically companies have targeted female customers, but now they're starting to develop products and marketing for men. What does this mean, well companies such as Coach (COH), Michael Kors (KORS), and LVMH Moet Hennessy Loius Vuitton (OTCPK:LVMUY) would double their potential customer bases if they can convince men they need fashion status products.

Traditionally these companies only geared products to female shoppers because most men weren't so concerned. Recently however, these companies are increasing lines and marketing towards men. These companies have also noticed that Asian countries are spending money on social status and are increasing marketing efforts of their products there too. Below I'll talk about their prospects and which of these three companies stands to make investors the most money.

As of its latest 10-Q, Coach has $1.1 billion in cash and only $23 million in debt. Net sales increased 14.6% and same store sales in North America increased 8.8%. In China Coach opened nine new stores and reported has double digit same store sales growth, and in Japan it opened six new locations. This year is showing faster growth in Japan as in fiscal 2011 it opened eight stores for the whole year.

Coach at current prices is just off its 52 week high and up 74% since its 52 week low in August of 2011. It has lots of things going on right now, it's trying to increase North American presence, establish and grow Asian presence, and convince men they need Coach products. I think these goals coupled with two growing quarters have caused shares to reach their current point where they are overbought. I like the stock and like the dividend, but I would wait for a pullback to at least the $70 point.

Since going public at the end of 2011, Michael Kors is up 85%. In its most recent earnings release it increased guidance for EPS up $0.05 for the year to $0.79 to $0.81. It reported that for a 50 week period so far in the year that same store sales were up 39%. As of its third quarter reports Michael Kors had $106 million in cash and only $16 million in debt. Revenues for the third quarter were $354 million versus $435 million for third and fourth quarters of fiscal 2011.

It just announced a secondary offering of 25 million shares, which increase the total share count by about 13%. Any dip based on this offering might be the best pullback we'll see and offer the best buy in point in the near future. Going forward I like KORS but also worry about its growth prospects given the recent run.

LVMH is a large conglomerate that deals in many areas that don't directly compete with Coach or Michael Kors. Its fashion and leather goods segment is a direct competitor however. Since hitting its 52 week low in October, shares are up 33.9%. For fiscal 2011 that segment produced $11.5 billion in revenues which was 36.8% of corporate revenues. For that same period it made $3.1 billion in profits or 35% of the company's profits.

In fiscal 2011 it began a program targeting even higher end customers that have a desire to personalize their own bag. To follow the trend of marketing to men, Louis Vuitton started a made-to-order footwear and belt service. Organic revenue growth for the segment was 16% versus fiscal 2010.

Future growth plans include continuing to add many more personalization options. In addition to product growth, it plans to grow its retail footprint across the globe, with a special focus in new markets such as Brazil, Barbados, and Kazakhstan.

LVMH has a clear size advantage with a market cap of $82.9 billion versus Coach at $21.4 billion and Michael Kors at $8.4 billion. Going forward I like Michael Kors the best. Despite its recent run, it has the most to grow. Even though it currently trades at a P/E of 66, I see it continuing to establish itself and gaining market share. As already mentioned the secondary offering has brought a dip in the price and offers the best buy in point that we will have.

With continued growth shares should see $50 easily before the end of 2012 and could even get close to the $60 mark. When I asked my wife, I expected her to pick Louis out of the three simply because it's the most expensive. But she said she likes Michael Kors because the products keep up with the fashion trends better than the other two. In addition, its products are more subtle in their notoriety versus Coach products that have the "C" plastered all over its products.

If you are looking for something safer then go with Coach as it offers steady growth and a steady dividend. LVMH is a nice stock, but its multiple product lines require an across the board increase in luxury spending that it has to capture to provide huge returns to shareholders. But, as people have learned to scrimp and save during these tough times, you can bet that as they begin to make money again, they will spend the excess to treat themselves after the hard times.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.