Are These High-End Luxury Retailers Compelling Buys?

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It may seem paradoxical, but luxury retailer stocks sometimes are priced at compelling values. Are there any luxury retailers trading at values that represent a good deal?

Michael Kors Investors Cashing Out

Michael Kors, a fashion designer is planning to sell 3 million shares of his holdings in his namesake stock Michael Kors Holdings (NYSE: KORS) as part of a secondary offering of 25 million shares in the company. His holdings in the company will be reduced to 4.8 million shares, representing a 2.4% stake in the company, down from 3.9%. Sportswear Holdings, a private equity firm, which is thr largest investor in the company, would sell approximately 19.7 million shares in the company or 62.9% of its holdings in the company.

Post sale, Sportswear Holdings would have only a 5.8% stake in the company. Investment vehicles which were created for the benefit of the children of John Idol, the company’s CEO, would sell 2 million shares during the offer. Since all the sales would be made by the investors, the company would receive no proceeds from the offer. The company has raised its full-year forecast after declaring an increase in sales during the holiday season, consisting of a 41% increase in comparable sales in North America during the last quarter. The company is taking away the market share of its competitor, Coach (NYSE: COH).

Cynics may question the motives of such stock sales by insiders. I do not see this as being a clear negative for the company since investors are retaining significant holdings.

Coach Leadership Change

Coach appointed Victor Luis as the head of the company’s international business, succeeding Lew Frankfort, the company’s CEO next year. Frankfort would become the company’s Executive Chairman as of January and appointed Luis as the President and Chief Commercial Officer in the interim; he will be soon appointed on the company’s board. Mr. Luis led the company’s businesses in Japan and China before taking responsibility of the President of International Retail in 2010 and then became the head of the entire operations outside North America last February. Before becoming a part of the company, Luis conducted the North American operations of Baccarat, a French luxury brand.

Mr. Frankfort joined the company as Vice President of New Business Development in 1979, and he led the company’s transition into a publicly traded company in 2000. He created the company as a dominant U.S. handbag company having approximately 30% market share. The company’s CEO focuses on expanding across China, where the company has created 117 stores as of Dec. 29. Recently, the company has focused on male customers with stores of their own as well as dual-gender locations. He also assisted Reed Krakoff, the Executive Creative Director of the company, in developing a women’s apparel brand and accessories line, “Reed Krakoff.”

The company’s same-store sales in North America have declined due to increasing competition from Michael Kors, Tory Burch, and other companies. Coach is planning to transform itself into a lifestyle brand by creating its own jewelry, footwear, and clothing lines to expand its business. According to Liz Dunn, an analyst with Macquarie Group, “The succession comes at a time when the company is undergoing significant strategic change. It is the right move to support Coach’s geographic growth opportunities and expansion into new lifestyle categories.” The company’s net income increased by 1.5% to $352.8 million or $1.23 per share for the quarter ending December 2012. According to Bloomberg, analysts expected $1.28.

Innovation at Nordstrom

Nordstrom (NYSE: JWN) reported a 20% increase in its net income in the fourth quarter as high-end shoppers continue to spend on clothing and makeup. However, the company’s annual guidance was a disappointment to investors as the department store continues to invest across e-commerce operations heavily and expand its low-priced Nordstrom Rack stores.

Since 2009, there has been a rebound in luxury spending, and the company is receiving orders from shoppers via smartphones and tablets. Nordstrom is courting these consumers by offering online shoppers free shipping. The company has also introduced mobile devices for its sales associates so that they can check out shoppers from anywhere in the store.

According to Blake Nordstrom, the company’s President, “We aspire to be the retailer of choice wherever and whenever customers choose to shop with us. And we understand that our customers' definition of services (is) changing.” The company’s net income was $284 million or $1.40 per share during the quarter ended on February 2013 as compared to $236 million or $1.11 per share during the previous year. The company established 15 new stores during the 2012 fiscal year and displayed strong growth during the fourth quarter. The overall revenue in stores open at least a year rose by 6.3%.

Trouble at Tiffany’s

Tiffany & Co. (NYSE: TIF) has alleged that Costco (NASDAQ: COST) sold forged Tiffany’s diamond engagement rings. In addition to being the basis of litigation, this could be bad for Tiffany’s brand since discounting at big-box prices could detract from the mystique of its jewelry and iconic blue packaging. As per the allegations, Costco has sold different styles of rings for several years which have been falsely identified on an in-store signage as a Tiffany’s brand. The jeweler is trying to prevent any further sales of its diamond engagement rings and unspecified damages related to the previous sales. According to Tiffany’s the sales unlawfully damage the company’s goodwill and brand awareness.

Valuation

Coach appears to be the only compelling stock among these luxury names:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/FCF</span></strong></p> </td> <td> <p><strong><span>D/E</span></strong></p> </td> <td> <p><strong><span>EPS Growth Next 5   Years</span></strong></p> </td> </tr> <tr> <td> <p><span>COH</span></p> </td> <td> <p><span>Coach</span></p> </td> <td> <p><span>13.31</span></p> </td> <td> <p><span>2.75</span></p> </td> <td> <p><span>22.65</span></p> </td> <td> <p><span>0.01</span></p> </td> <td> <p><span>13.5%</span></p> </td> </tr> <tr> <td> <p><span>JWN</span></p> </td> <td> <p><span>Nordstrom</span></p> </td> <td> <p><span>15.19</span></p> </td> <td> <p><span>0.89</span></p> </td> <td> <p><span>28.78</span></p> </td> <td> <p><span>1.64</span></p> </td> <td> <p><span>11.8%</span></p> </td> </tr> <tr> <td> <p><span>MOV</span></p> </td> <td> <p><span>Movado Group</span></p> </td> <td> <p><span>15.4</span></p> </td> <td> <p><span>1.81</span></p> </td> <td> <p><span>28.89</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>12.0%</span></p> </td> </tr> <tr> <td> <p><span>TIF</span></p> </td> <td> <p><span>Tiffany & Co.</span></p> </td> <td> <p><span>20.73</span></p> </td> <td> <p><span>2.27</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.4</span></p> </td> <td> <p><span>10.2%</span></p> </td> </tr> <tr> <td> <p><span>RL</span></p> </td> <td> <p><span>Ralph Lauren</span></p> </td> <td> <p><span>22.77</span></p> </td> <td> <p><span>2.27</span></p> </td> <td> <p><span>28.88</span></p> </td> <td> <p><span>0.07</span></p> </td> <td> <p><span>13.1%</span></p> </td> </tr> <tr> <td> <p><span>KORS</span></p> </td> <td> <p><span>Michael Kors</span></p> </td> <td> <p><span>34.87</span></p> </td> <td> <p><span>6.05</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span> 32.6%</span></p> </td> </tr> </tbody> </table>

Though Michael Kors has excellent growth prospects, it is trading at dangerously high price-to-sales and price-to-earnings ratios. Nordstrom is fairly priced, but it has a high debt-to-equity ratio.

Conclusion

In a screen of luxury retailers only Coach looks attractive. Its fundamental story in no way explains why it is trading at a discount to its peers, and investors should consider it as a luxury stock buy candidate.


BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Coach and Costco Wholesale. The Motley Fool owns shares of Coach and Costco Wholesale. 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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