2 Luxury Retail Stocks To Avoid, 1 To Buy

by: Bidness Etc

After the recent plunge in Burberry's (OTCPK:BBRYF) shares due to lower demand from higher income customers owing to economic uncertainty, other luxury retailers are taking a hit as well because of the general pessimism. Yesterday, Burberry was down 21% on the London Stock Exchange. Tiffany (NYSE:TIF), Ralph Lauren (NYSE:RL) and Coach (NYSE:COH) were down 1%, 3% and 2%, respectively, in sympathy. Coach was also downgraded by Brean Murray. We stand by our hold ratings for TIF and COH and buy rating for RL.

Burberry guided to a full-year profit at the low end of its guidance range of $652-$722 million. Burberry's CEO said that the company was not the only luxury goods retailer who was facing challenging times.

Moreover, China is the primary growth driver for luxury brands at the moment, with many brands expanding to take advantage of Chinese demand. Any slowdown in the country would affect many luxury brands. Burberry reported weaker Q1 sales in China. The economy in China grew by the slowest pace in the last three years. Europe is the main area suffering due to its debt crisis, and has led many retailers to cut their outlooks.

Tiffany (TIF)

Tiffany, which primarily derives its revenues from the sale of jewelry, has recently cut its future outlook due to slower sales. Twelve percent of its revenues come from Europe. It has been witnessing slowing sales growth in the U.S., China and Europe. 1Q2012 saw a 7.6% growth in net sales, while 2Q2012 saw only a 1.6% gain. It has a beta of 1.8, and has lowered its sales growth by 1 percentage point to 6%-7%. EPS guidance has been reduced to a range of $3.55-$3.7 from $3.7-$3.8. To read more about Tiffany, see our previous article.

Coach (COH)

Coach , an "affordable luxury" retailer that generates most of its revenues from accessories like handbags, has seen a decline of 18% after its Q4 FY2012. This was amidst fear of losing its market share to a faster growing competitor, Michael Kors (NYSE:KORS). North American same store sales were 1.7%, far less than analyst expectations of 6.5%. Twelve percent of its sales come from international operations, and the rest come from the U.S. (70%) and Japan (18%). The company is looking forward to expanding further in Korea and Malaysia, terming FY2013 to be "an investment year." Coach also reiterated its target of continuing its double digit sales and profit growth.

To read more about Coach, see our previous article.

Ralph Lauren (RL)

Ralph Lauren, another apparel and accessories retailer, has significant exposure to Europe and Asia. Europe accounted for 22% of RL's 2011 revenues, while Asia accounted for 14%. RL had issued a weak Q2 outlook after beating analyst estimates for earnings and revenues for Q1 FY2013. Q1 revenues had also suffered due to European exposure, but the reduction was offset by gains elsewhere. RL is expecting a mid-single digit decline in Q2 revenues and a mid-single digit increase in sales for full fiscal year 2013. The company is focusing its efforts on China and expects pressure on revenues due to the currency effect and its own strategic moves to replace partner-run stores in China with its own. We are bullish on RL due to several factors. To read more about those factors, see our previous article.

The consensus target prices for TIF, COH and RL are $69 (compared to $62 at present), $67 (compared to $61 at present) and $175 (compared to $156 at present), respectively. The long-term growth rate expectations for TIF, RL and COH are 12%, 13% and 14%, respectively.

We reiterate our hold rating for TIF because economic uncertainty seems to be catching up with customers (especially in the European region) in the higher income bracket as well. We also stand by our hold rating for Coach due to competitive and economic pressures. However, these companies have established brand names, and we will be bullish once the economy starts to recover and they achieve their international sales potential. We recommend buying RL, which is trading at a 16% discount to its 52-week high, and is up 4% in the last month.

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

Business relationship disclosure: The article has been written by Qineqt's Retail Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.

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