Don't Just Follow Trends, Add Some Style to Your Portfolio

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

Fashion trends are always changing. Remember Crocs and Juicy track pants? Nobody would be caught dead in either of those items today. Remember how big plastic-framed glasses used to be cool, and then they were nerdy, and now they’re cool again? I’ll probably have ditched my hipster lenses in five years, just to buy a new pair when I turn 60. Fashions are short-term. So why would any long-term investor buy shares in a fashion company?

Because certain companies have style. While style is often used interchangeably with the word fashion, I define them differently. Style is timeless and somewhat personal. The guys over at Effortless Gent put it best, “The truly stylish man knows, understands, and respects the rules, yet knowingly defies and breaks them, bends them and interprets them as he pleases.”

I want to invest in stylish companies and avoid companies that are merely fashionable. That means bypassing Crocs (NASDAQ: CROX) and buying companies like Coach (NYSE: COH), Michael Kors (NYSE: KORS), and Ralph Lauren (NYSE: RL). These companies operate in the luxury apparel space, which I believe has room to grow in the coming years.

The Fashion Trend

Stylish investors still need to pay attention to the market trends, just as the most stylish dressers pay attention to what’s going on in fashion. The market has beaten down retail stocks this month with fears that the government will be unable to resolve fiscal cliff issues under the second Obama administration.

However, with news coming out this week, negotiations look to be making progress, and investors are gaining more confidence in retail stocks already. If the fiscal cliff is bridged, rich people will have more discretionary income to spend on luxury retail items.

Luxury retail isn’t just for the rich though. Nearly half of Americans said they plan on splurging on at least one piece of luxury apparel in the next six months, according to a recent poll. They aren’t looking for the most extravagant items, just something nice to add to their wardrobe. Coach, Michael Kors, and Ralph Lauren all specialize in this market of upscale, but not too expensive apparel.

Style

Companies that can consistently provide great margins, increased revenues, and improved earnings in the relatively unstable fashion industry are definitely stylish. They adapt to trends and make them their own, inviting consumers to stay loyal to their brands.

Each of these companies has either grown its margins or maintained its already stellar margins over the last three years.

 

 

Revenue growth is very strong for each of these companies. Over the last two years, revenues for Coach and Ralph Lauren have grown 32% and 38%, respectively. Meanwhile, Michael Kors more than doubled its revenue in two years, increasing it 156%, and is quickly catching up with its bigger competition.

Of course, all these positive growth and margin numbers leads to excellent earnings. All three companies have beaten analyst earnings estimates for the past four quarters, and I see no reason why this trend can’t continue. Coach has grown its EPS from $1.93 to $3.60 within the past 3 years. Similarly, Ralph Lauren has improved EPS from $4.13 in 2009 to $7.30 in the last twelve months. Michael Kors improved net income from $30.8 million in fiscal year 2010 to $126.1 million in 2012.

Best Fit

The key to any article of clothing is fit. Similarly, you need to find the right fashion company that fits your portfolio to make it look and perform its best.

Investors looking for growth would look smart with shares of Michael Kors in their portfolio. The company has consistently outpaced growth expectations since its IPO last December. In the last quarter, the company showed that it can produce great numbers anywhere, even in the bleak, albeit competitive, European market. It still has room to expand in Asia, particularly China, where Coach has already done well.  

For investors looking for a strong dividend, Coach pays back over 2% annually in dividends. With a 33% payout ratio and strong free cash flow quarter after quarter, that 2% has just as much potential to rise as the stock price. Coach is the lowest priced of the three companies listed here in terms of forward P/E, which is at just 14.3x. Comparatively, the industry trades at a forward P/E of 16.4. That earnings multiple is enhanced by analysts’ expectations that the company will grow at a greater than 13.5% clip over the next five years, resulting in a PEG of 1.1.

Ralph Lauren is somewhat stuck in the middle. Revenues for the company have grown faster than Coach in the last three years, but not by much. Similarly, analysts expect the two companies to grow at about the same pace over the next five years. However, with a forward P/E ratio of 19.9 and a dividend of just 1%, it doesn’t look quite as attractive as Coach.


adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach and Crocs. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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