China's Conspicuous Consumption Plays

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

Two important trends in China are key for investors, conspicuous consumption and e-commerce. The three best names are:Coach (NYSE: COH), Michael Kors (NYSE: KORS) and Macy's (NYSE: M). There are other luxury retail names that bear watching like PPR (PA:PP) and Louis Vuitton Moet Hennessy (OTC:LVMH) but these are not as transparent and due diligence is much more difficult..

Want To Flaunt

The Chinese government has been cracking down on government corruption making a notable example by firing a state safety official, Yang Dacai, after he was spotted in several photographs wearing different luxury brand watches. Despite the crackdown which has led the prosperous in tier one cities like Beijing and Shanghai to tone down conspicuous consumption the government can't shut down an innate need for the newly wealthy in China to show off.

In tier two and three cities luxury spending has been little affected as the attitude is best characterized by the aphorism, "The sky is high and the emperor far away." Coach and Kors stand to benefit with both brands immediately recognizable across a crowded tier two city street. As an article in The Economist underlines young professionals want to flaunt with well known luxury brands that scream, "I'm Wealthy!" With a prosperous young adult shopper (more than three quarters of China's wealthy are under 45) Kors may even outperform Coach as its apparel and accessories are more glitzy and reek nouveau riche with their Hollywood accents and eponymous founder on Project Runway.

Another reason Coach and Kors should outperform is that even where available on the mainland luxury brands usually cost more, up to 30% more, a compelling reason for Chinese tourism to Paris and New York. After decades of drabness and politically correct inconspicuousness the Chinese are on track to be the world's biggest group of shopaholics outspending other nationalities on spending while traveling by almost 50%. And when overseas travel is difficult travel to Hong Kong is usually possible. Michael Kors is based in Hong Kong and Coach is beginning to manufacture on the mainland to address these issues.

 E-Commerce Is The New Frontier

By 2015 luxury e-tail in China should reach over $5 billion and most of this will be those younger aspirational shoppers. Coach moved into Chinese e-tail in 2012.  Macy's has seen the future and is collaborating with an e-commerce site with many of the brands the aspirational want and find hard to buy on the mainland. Macy's should be able to use their "localization" strategy  that's worked so well in the US in China. Macy's has spent $15 million on what's called the O2O, Online 2 Offline commerce business model, on the Chinese online retailer site which will debut exclusive, fresh, and in stock Macy's items at original prices in Spring 2013. This is a huge deal in China as their homegrown e-tailers fall over themselves to cut prices while losing the original cachet of the name brands. For more about the advantages of O2O in China, click here.

Macy's, Coach and Kors need to engage shoppers born after 1990 most significantly and women in particular. Already the Chinese online site Taobao found that 70% of online luxury shoppers in China were female. In fact, they were more likely to shop online than at bricks and mortar establishments. And of course, younger women are more prosperous than they've ever been in China with a pent up demand for luxury goods that is almost insatiable, spending over $2 billion online in 2012.

Coach and Kors and China

Of all these Coach has the biggest presence in mainland China and Hong Kong with "96 Coach-operated department store shop-in-shops, retail stores, and factory stores in Hong Kong, Macau, and mainland China; and 34 Coach-operated department store shop-in-shops, retail stores, and factory stores in Taiwan and Singapore." (from Yahoo company profile)

Coach was named a Number One stock pick by Kiplinger's for 2013 mainly due to its 40% growth in China as well as its yield of 2.20%, which it has raised consistently since 2009 and16.52 P/E. Barclays also named it as one of their 60 top Global Picks for 2013 based on clean balance sheet and free cash flow. CEO Lew Frankfort is also a big shareholder with 2,064,547 shares as of December 27.

Return on equity is an impressive 54.86% and analysts give Coach a $75.00 price target. Even with the January 8 move up 3% there is still upside in this name which was down 6% over the last year. Total debt is $23.26 million to total cash of $760.76 million.

Michael Kors has had a stunningly successful first year as a publicly traded company, up 98.83%. As a stock it isn't quite the value proposition that Coach or Macy's are with a P/E of 42.13 and no yield. While it does have stores in Japan it licenses rights to sell their merchandise in Hong Kong, Macau, and China.

Its debt to equity ratio is similar to Coach with only $11.62 million in total debt to $312.24 million total cash. It also has an insider hold of over 50%.

The  Chinese Takeout

As a Forbes article pointed out some business models like Yum! Brands, McDonald's, and Apples are lost in translation to China with local supply problems, following a distant corporate blueprint, labor problems etc.

That's why of all these names, Macy's may benefit the most as their O2O commerce site will not be reliant on the vagaries of local supplies, labor problems, or a corporate blueprint. Macy's probably is the biggest value of all these names, anyway, as it's trading at an 11.48 P/E with a 2.10% yield. With this website launching in the spring and Macy's  little known as a play on China now may be the time to start accumulating this retailer.


leglamp 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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