Three Affordable Luxury Stocks with High Profitability

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There is something very interesting about companies which have a distinguished brand value in the affordable luxury business.  If the company is well run and the brand is successful, the business can generate above average profitability both in terms of margins on sales and return on the company´s capital. The other side of the extra price than some brands command to consumers is higher profitability for the company and its investors.

One of the best companies in the sector, and a personal holding of mine is Coach (NYSE: COH), a marketer of luxury handbags and accessories which has sustained extraordinary levels of profitability through the years. Coach has gross profit margins above 72% and the company keeps an operating profit of almost 32% of the sales price. Return on Equity is really fabulous at Coach, near the 54% annually.

The combination between a valuable brand and management team permanently working to keep high levels of efficiency in sourcing and distribution has produced these kinds of numbers at Coach, which are clearly unmatched in its industry. The company is also in a sweet spot regarding international expansion opportunities: Coach has proven to be very successful in Japan and China, but still has plenty of room for further growth.

The company has more than 500 stores in the US, less than 200 in Japan and is in its way to 100 China stores in the short term, so both Japan and China have a lot of potential for more stores as long as demand keeps growing strongly. Competition in Europe is expected to be much tougher than in Asia, but the company is giving its first steps in the old continent and, judging by how well it has done in other regions, a successful expansion into Europe cannot be ruled out. Besides, Coach has made a smart move by launching its men´s accessories line of products, which capitalizes on the company´s brand name and store presence to promote growth via new product alternatives.

 Shares of Coach are trading at a P/E ratio of 18; this may not sound like a bargain in comparison to other companies in the industry, but Coach certainly deserves a premium in valuation. The company has delivered an annual increase in earnings per share in the 16% zone for the last five years, and that period includes a severe recession which affected other companies to a much bigger extent. The company is in great financial shape, so it will likely continue increasing its dividends and buying back stock for a long time.

Other alternatives I have been considering are Tiffany (NYSE: TIF) and Polo Ralph Lauren (NYSE: RL) the world famous jewelry and the classic clothing brand have some characteristics in common with Coach. A very recognizable brand generating above average profitability, as well as strong demand from Asia and emerging markets are two desirable characteristics which make these two companies worth following.

Tiffany has an operating margin near 19% and Ralph Lauren is in the 15% area, while both companies have a Return on Equity ratio barely above 20%. Those numbers are well above average, although they are still below the remarkable figures that Coach has delivered over the last years: 32% operating margins and a ROE near 54%.

The three companies have valuable brands which give them solid competitive advantages; this means they are well positioned to outperform the indexes over the long term. However, Coach excels when it comes to operating efficiency and management track record, and that is what makes the handbags maker is my favorite bet in the accessible luxury sector.

acardenal owns shares of Coach. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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