Can This Luxury Stock Continue to Outperform?
Ankit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The stocks of luxury goods companies took a little beating following an acknowledgment from British retailer Burberry that sales have slowed considerably. However, the stocks recovered well on Friday as investors gained some of their appetite for riskier stocks. The following graph summarizes the stock price movement of luxury goods companies like Coach Inc, Ralph Lauren (NYSE: RL), Tiffany (NYSE: TIF), Saks (NYSE: SKS), Nordstrom (NYSE: JWN) and Fossil Inc (NASDAQ: FOSL).
Looking at this chart, it seems as if there was some major catalyst at work on Friday. However, that is not the case and the recovery in these stocks primarily reflects that investors are choosing to get back into riskier, more volatile growth stocks as the broader market has stabilized. The major gainer among these companies was Fossil whose shares jumped more than 11% on Friday. Let’s analyze weather this company is likely to continue its current momentum. The following chart summarizes the valuation multiple and growth rates for Fossil, Ralph Lauren, Saks and Nordstrom.
|
Company |
Saks |
Tiffany |
Ralph Lauren |
Nordstrom |
Fossil |
|
Forward P/E |
20.05 |
15.92 |
18.16 |
14.46 |
15.29 |
|
Growth Next Year |
20.80% |
14.40% |
14.60% |
14.40% |
15.50% |
|
Growth Next 5 Years |
16.20% |
14.46% |
13.36% |
8.97% |
18.50% |
Source: Yahoo Finance
We can see that Fossil has the “best-in-class” annual growth rate over the next 5 years yet it is trading at a discount to Saks, Tiffany and Ralph Lauren. Thus, the consensus estimates clearly reflect that Fossil is highly undervalued and the stock is worth looking at.
Following a troubling Q1 when the company saw top-line trends decelerate meaningfully, Fossil posted a much better than anticipated Q2 – with upside stemming from stronger gross margins. The acceleration across geographies and strong growth in the watch category were the two most important points of strength in the quarter. Additionally, the integration of Skagen appears to be going very well.
The company is well positioned to grow sales and EPS through multi-channel distribution globally. The company has a strong portfolio of brands that target various income strata. Its US wholesale business is currently enjoying a strong watch cycle. Its Europe and Asia segments are still in the early stages of growth from the same trends. Fossil's licensed brand business is growing rapidly as strong fashion labels extend into the watch category.
Easier Comparisons
The company will begin to face easier compares in 2H as it laps peak product costs and its investments in the Asia business. Fossil will also begin to lap softer Europe results in the coming quarters. Further, the company's gross margins should continue to benefit from price increases and a continued mix shift to Asia and DTC.
Swiss Watch Export Growth
Swiss Watch export growth is a good predictor for Fossil’s trends. The value of Swiss watch exports almost attained two billion francs in July, implying an increase of 15.8%. Although Hong Kong (-1%) and China (-9%) slowed, but growth across the rest of Asia offset a slowdown in China and Hong Kong. Moreover, growth in the US (+9%), France (+25%) and Italy (+23%) remained robust. The sector therefore shows no obvious sign of losing its momentum in terms of exports, despite what was expected.
White Space Opportunity
Fossil continues to fill that niche below the high-priced brands and drugstore watches with its owned and licensed brands. This is an underpenetrated space and in addition to the brand portfolio, the quality and design integrity of the products provides Fossil an edge. Moreover, economic fundamentals in Asia are improving, and the expansive and growing population presents a huge potential customer base. China has already become the world’s second largest market for luxury goods. Further estimates predict that China will become the largest upscale product and consumer goods market in the world. Other opportunities include potential for growth in India, Japan and Korea given Fossil’s recent investment in talent and infrastructure. A layer of Swiss-made product such as the $1,000 Burberry Britain adds another opportunity given Fossil’s strong distribution network including owned stores. Margins should also benefit from more scale.
To sum up, I think Fossil is significantly undervalued despite the recent gain. The company posted good results in its recent quarter. Easier comparisons in the back half and Swiss watch export growth provide good visibility in the near-term. Moreover, the company looks well set to drive long-term growth with huge white space opportunity in the Asian markets and a diverse portfolio of brands targeting various income strata. Thus, I recommend buying this stock.
ankitagrawal has no positions in the stocks mentioned above. The Motley Fool owns shares of Fossil and Tiffany & Co. Motley Fool newsletter services recommend Fossil. 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.
