The Smell of Money
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
To quote F. Scott Fitzgerald, "The very rich are very different from you and me." The rich smell different. They just do. That may partly owe to better health and nutrition, but an understated fragrance of prosperity tops it off.
Americans spend $25 billion to $30 billion on fragrance annually according to a 2009 New York Times article -- probably more now, as ecomomic conditions gradually improve. Some 83% of women wear fragrance at least occasionally, and a third wear fragrance daily. Men's fragrances are becoming ever more popular as well. At least a third of the ULTA salon I visited a month ago was dedicated to scents, and more than a third of that was for men.
It's no surprise that fragrance TV and print ads saturate the admosphere, especially around the holidays. Famous fashion designers often rely on a scent to carry them through a rough patch, fashionwise. Yves St. Laurent is reputed to have said that in some years, the fragrances made up more than three quarters of his fashion house revenues. You can't deny this trend for a better-smelling world.
Who Benefits?
French designers and celebrities get it, but so does Macy's (NYSE: M) , the department-store retailer that grasps the aspirational yearning of the wannabe plutocrat and the importance of fragrance. CEO Terry Lundgren has made it policy that fragrances and cosmetics are always located near the front of Macy's stores, including its Bloomingdales stores. Macy's is counting on good holiday sales, and fragrance is a big part of that for the company; Christmas and Valentine's Day are the most likely fragrance purchase timeframes. Those numbers won't be reflected yet when Macy's next reports on Nov. 7.
Why is fragrance such a profit driver? Fashion companies love to create a successful perfume because the profit margins are often over 75%, with 95% of ingredients being synthetic and petroleum-based, created in laboratories. It may take a "nose", a highly trained perfumer, to create a fine perfume, but it takes a "brand" to push it. People will pay up for a brand name that equates with wealth and pampering.
Two "brands" that get it are Ralph Lauren (NYSE: RL) and Michael Kors (NYSE: KORS), which both offer signature eponymous fragrances. These are fashion icon names, recognizable worldwide.
Lauren grew his namesake multibillion retail empire by very closely observing the rich and what they wore, and making it available to the aspirational millions. Lauren, born to Russian Jewish emigres and growing up in the Bronx, used his outsider yearning to his advantage to outrich the rich, down to the olfactory details. His fragrances for men and women never smell cheap.
Ralph Lauren is trading at 21 times earnings with a 1% yield, and is still off more than 10% from its average analyst price target. The company rescheduled its earning report for Nov. 2 before the bell.
Compared to Ralph Lauren, down almost 20% from its 52-week high, you would be smelling sweet if you'd owned Kors. The stylish upstart has certainly been the IPO and fashion darling of Wall Street and Fifth Avenue, as reflected by its premium-priced 55.43 P/E and 28.98 forward P/E. The brand continues to expand and has a second lower-tier line called Michael for the wallet-challenged aspirational shopper. Kors shares have more than doubled since its December 2011 IPO.
Licensing alone, including fragrance, comprises one of Kors's three operating divisions. Surprisingly, the short interest is only 3.40% for this momentum name, and it has little debt compared to cash.
Which of these passes the smell test?
Macy's has the highest yield at more than 2%, and has the lowest P/E at 12.16. Its total debt to cash is the highest, however, at $6.95 billion to cash of $1.60 billion in debt. But Macy's return on equity is a more impressive 22.65%.
As for Ralph Lauren, it has strong insider and institutional support, with Founder/CEO Ralph Lauren owning 489,723 shares out of 91.15 million shares outstanding. Total debt is only $261 million to total cash of $1.03 billion.
While trendy Michael Kors beat and raised at its last earnings, with momentum names in the fickle world of fashion, Kors could stumble on the earnings catwalk come Nov. 13.
Of all these names, I like Macy's and Ralph Lauren most. Both are affordable and aspirational names, and both understand that even so tiny a detail as fragrance is the topnote -- and the finishing touch -- to their retail success.
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