Michael Kors' Profits Signal Rise in Luxury Spending

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And yet another sign of an improving economy – the rising sales of luxury goods.

The maker of every woman's favorite handbag, Michael Kors (NYSE: KORS) reported increases in several key figures for fiscal year 2012 ending on March 31, 2013. The company even had positive results in Europe, despite the economic headwinds that continue to persist in the area. The large increase in sales has led the company to take market share from rival Coach (NYSE: COH). Meanwhile, another luxury brand, high-end jeweler Tiffany (NYSE: TIF) also reported strong results.

The state of the luxury market

According to a report by Unity Marketing, the recent rebound in consumer spending can be mostly attributed to affluent consumers who earn between $100,000 and $250,000 per year and are known as the Henrys, which stands for High Earnings, Not Yet Rich. This group represents around 24.2 million households, or the top 20%. This group is believed to be behind most of the current consumer spending taking place.

Ultra-affluent consumers, who earn more than $250,000 per year, were seen as making strategic trade-offs in their purchasing to “maximize the luxury return on their investment.” The research showed that their buying behavior has shifted and is very similar to that of the Henrys. They are trading down to less premium brands, for example shopping for jewelry at Zales rather than Tiffany. This group is being very selective and indulging in “premium class goods and services” – items that are below luxury, but of higher quality than a mass-market brand.

The growth of Michael Kors

Michael Kors CEO John Idol noted that fourth-quarter results for fiscal 2012 were stronger than expected due to the improving demand across all of the company’s business segments. The clothing and accessory designer reported that North American same store sales rose 35% and European same store sales rose 63%. Net income for the year was $101.1 million, or $.50 per share, a sizable increased over the previous year’s profit of $43.6 million, or $.22 per share. The company easily beat Wall Street EPS estimates of $.39.

The growth in revenues exhibited by Michael Kors in the last fiscal year may in part be attributed to the affluent consumers described above. While the brand markets itself as synonymous with luxury and the jet-set, there are also more affordable pieces that sell well to a wider clientele without diluting the value of his higher end collection. So, the Kors product line fits very well with the current purchasing behavior noted among higher earners.

 Coach has improving results and stiff competition

Coach reported good results in the third quarter ended March 30, 2013 with net income of $239 million and diluted EPS of $.84. This compared to the prior year’s third-quarter income of $225 million and diluted EPS of $.77; both figures increased by 6% and 10%. In the North American market, Coach has seen intense competition from other brands, such as Michael Kors, Kate Spade, and Tory Burch.

According to Forbes, during the past holiday season, the brand did not engage in the same promotional activity as its competitors, which led to a decline in market share in the handbags market. And competitors are expected to continue to negatively impact sales. Coach’s growth and expansion in overseas markets, such as China, can help to counter declining U.S. sales -- in the third quarter, total sales from China grew 40%.

Tiffany’s soft sales in the Americas but greater Asian demand

Tiffany’s first quarter results saw an increase of 3% in net earnings to $84 million, or diluted EPS of $.65. Prior year results were $82 million, or diluted EPS of $.64. The Americas region saw total sales rise 6% from last year, while the Asia-Pacific region’s sales rose 15%.

For the next fiscal year ending January 31, 2014, diluted EPS forecasts range between $3.43 and $3.53. Analyst growth projections for the next five years are estimated at 11.7%, just under the industry average of 12.2%. The company recently named a new Senior Vice President of Northern America to drive sales in the company’s largest region.

Conclusion

As long as affluent consumers continue their selective spending spree, luxury brands should see improving sales. An improving job market and the long-term possibility of increasing wages and salaries could also benefit these luxury brands. Michael Kors may have the greatest upside potential of the three; the company has an estimated 5-year growth of 28% versus 11% for Coach and Tiffany.

Analysts surveyed by Thomson Financial Network rate the three stocks “buy.” Kors, however, seems like a better choice over Coach and Tiffany, which seem to be having a harder time dealing with soft demand and competitive pressure within their more limited product lines.

Michael Kors is one of today's hottest high-end fashion brands, and that's translated into one of the best-performing stocks in retail. But with all that growth, has the stock finally become too expensive, or is there still room left to run? The Motley Fool's premium report on Michael Kors gives investors all the information they need to make the right decision, covering the must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.


Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of 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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