These Luxury Goods Stocks Are Still Buys

Includes: COH, KORS
by: Greg Group

A research report published on Monday by consultancy Bain & Co together with Italian luxury goods trade body Altagamma said luxury-goods sales will grow by 7% worldwide in the fourth quarter, leading to a 10% growth rate for the year to 212 billion eurodollars, (or $274.5 billion).

This year, the Chinese luxury goods market is set to rise by 8 percent at constant currencies and 20 percent at current currencies to reach $15 billion eurodollars ($19 billion), while last year it gained 30 percent using both measures, the report said.

Chinese consumers, many of whom shop abroad, have become the world's No. 1 buyers of luxury goods, ahead of the Japanese, the Americans and the Europeans, the study found.

By categories, leather goods and shoes are seeing an estimated growth of 16% and 13% each this year. Watches and jewelry are expected to gain 14% and 13% respectively. The industry growth is driven in part by men's growing interest in fashion, along with higher-quality, higher-priced items. For instance, men's apparel is seeing a 10% increase, above the 9% growth in women's apparel, according to Bain.

Forecasts for continued robust luxury growth, driven by demand for leather handbags, shoes and men's apparel, may signal shining opportunities for U.S. retailers and brands, including Coach (NYSE:COH) and Michael Kors Holdings Corp (NYSE:KORS).

Michael Kors sells clothing, footwear and other apparel and accessories through luxury department stores and its own company-operated shops. The company has enjoyed a recent boom in retail and wholesale demand, in part from its expansion of shop-in-shop branded areas in department stores.

Michael Kors generates three-quarters of its sales from handbags, watches and other accessories. The company's positioning as an "accessible luxury" brand also will likely make it a beneficiary of the luxury growth market.

Analysts expect the company's comparable sales this year to increase 35%, coming on top of a 39% rate last year. Michael Kors also has low penetration in Europe and Asia, which together represent under one-fifth of its business. That also presents them with long-term growth opportunities, he added.

The company raised its outlook, as it expects Q2 earnings in the range of $0.38 to $0.40, up from prior guidance of $0.33 to $0.35 per share. Revenue is seen at $510-$520 million. The analyst consensus is $0.36 per share on revenue of $492.9 million, according to Capital IQ.

For fiscal 2013, the company now expects diluted earnings per share to be in the range of $1.39 to $1.41, compared to its previous guidance of $1.32 to $1.34. The company now expects total revenue to be in the range of $1.85 billion to $1.95 billion, with comparable store sales of approximately 30%. The Street view is $1.94 billion in revenue and earnings of $1.39 per share.

Michael Kors will announce Q2 earnings on November 13. First Call analysts have a STRONG BUY recommendation on KORS, with a 1.5 stock rating. Analysts have a 12-month price target of $59.50 based on 2013 EPS estimates.

For Michael Kors rival Coach, the company will benefit from its expansion among male shoppers, as they are executing well in mens, and could attract Asian male consumers.

Easing investor concerns, Coach today reported a 5.5% increase in first-quarter comparable store sales in North America, its top market. The gain topped analysts' estimates of about 2.5% or less, and came in well above a 1.7% gain in the fourth quarter. Coach's fiscal first-quarter earnings rose 3%, as a jump in international sales helped to keep its margins flat with the year-earlier period.

On the international front, representing nearly a third of its total business, the company's China market -- which it has identified as a key growth market -- posted a sales gain of about 40%, with comparable-store sales rising at least 10%. Coach also has bought the brand's local retail businesses in South Korea and Malaysia.

The company credited demand for its expanded product line for men -- its Legacy collection at full-priced stores -- that features designs from its archives. Demand at its factory discount outlets, meanwhile, got a boost from management's move to reinstate coupons in late June, a reversal of its January decision to do away with them, which ended up hurting traffic and sales.

For the quarter ended September 29, Coach reported a profit of $221.4 million, or $0.77 a share, up from $215 million, or $0.73, a year earlier. Sales jumped 11% to $1.16 billion. Analysts polled by Thomson Reuters had most recently forecast earnings of $0.76 on revenue of $1.16 billion.

Also cheering investors, the company said its board has authorized the repurchase of up to $1.5 billion of shares by June 30, 2015.

First Call analysts have a BUY recommendation on Coach, with a 2.1 stock rating. Analysts have a 12-month price target of $70 based on a PE of 18 times 2013 EPS estimates.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.