Great Gatsby Stocks in the 21st Century
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Few authors better described the ultra rich than F. Scott Fitzgerald in "The Great Gatsby." Today, one fashion retailer embodies self-made Jay Gatsby in real life and his business: Ralph Lauren. His eponymous company Ralph Lauren (NYSE: RL) has created an almost voyeuristic lifestyle brand with images of East Coast mansions, beautifully idle models, and an old-money fashion signature.
Ralph Lauren is one of the companies listed in Jim Cramer's Great Gatsby index, which embodies the aspirational products high end consumers want. It includes Tiffany's, Saks, Starbucks, and other pricey retailers that Cramer expects to go higher.
Ralph Lauren, the stock, has performed well, but there is an arriviste to this luxe lifestyle competition--Michael Kors (NYSE: KORS), with his more glitzy, Hollywood and Real Housewives fashion sensibility.
These two fashion icons, Michael Kors and Ralph Lauren, are both self-made successes, and represent totally different fashion lifestyles. Frankly, if Fitzgerald were alive today he would likely write Gatsby based in Hollywood, reflecting its striving and decadence.
Fashion forward vs. looking backward
Lauren's world appeals less to the younger demographic, as it evokes a world of years past. Meanwhile, the Kors look is upscale and trendy in a way that is conspicuous, as opposed to the Lauren understated classic look. A Kors bag is recognizable from across a room--very much an advantage in its largest markets in Asia, where status can't be flaunted with flashy cars and big houses.
Investors clearly believe this thesis, with Kors outperforming virtually every retailer in its first year as a publicly traded company. Kors also made a lower price point line of men and women's clothes, Michael, for the aspirational with more style than money.
Michael Kors, the designer, is also a selling point for the stock as his television exposure on Project Runway, a reality fashion competition, gave him name recognition that it took Ralph Lauren years to acquire.
Michael Kors Holdings is trading at a 32.80 P/E, but its forward P/E of 22.84 compares favorably with Ralph Lauren's trailing P/E of 22.24. The PEG of Michael Kors is .90, signaling it may be slightly undervalued with its higher growth profile. The PEG for Ralph Lauren is more pricey at 1.55, but it has a small yield of 0.90%.
Coach (NYSE: COH), Kors' major direct competitor, particularly in accessories (the cash cow of fashion), has a huge presence in Asia. Coach has better gross margins of 73% to Michael Kors' 57%, and a yield of 2.40% But Kors has a fierce return on equity of 52.35%. Coach's fall from $76.00 to $50, despite its P/E at 13.79 and a PEG at .98, may be signaling that Kors has more mojo than downtrodden Coach.
Weak hands are hurting the stock
However, Michael Kors and CEO John Idol keep undermining stockholders' faith in the company with their repeated sale of their stakes. If Michael Kors doesn't believe in his company, why should we? When the stock tanked (only temporarily) last spring after the two sold big chunks on the lockup expiration, investors hoped the selling was done, and the stock started to rise again after beating earnings. Since its IPO Kors reported "stunning" accelerating revenue growth: 74% in November and 58% in August.
This lack of faith from the C-suite ruins what should be the most compelling story in retail. With no debt weighing it down, Kors continued its torrid pace of expansion as the company opened another 66 stores at the end of 2012 for a total of 237 retail stores, compared to 379 for Ralph Lauren. But maybe they're worried about the 60 stores Ralph Lauren plans for Asia, their biggest market.
A new cachet for this company
Both companies should keep an eye on their vintage roadsters' rear view mirrors for Kate Spade New York, the design line owned by Fifth and Pacific (NYSE: FNP).
Since the Wall Street Journal reported the company may consider selling its lagging Juicy Couture line (overpriced branded tracksuits and accessories) and Lucky brand to concentrate on Kate Spade New York, I'm liking the name even more. The styles are a tasteful bridge between Ralph Lauren's old money class and Michael Kors' nouveau riche glitz.
Kate Spade New York and its men's line, Jack Spade, are on pace to equal the Michael Kors expansion, with 217 stores in 20 countries, and more than double that by 2016. Whew! Kate Spade added net sales of $173 million to Fifth and Pacific's coffers last year, a rise of 56.8% for this one brand.
Kate Spade was forward thinking, moving into Asia as early as 2004 and most recently their tier two line, Saturday, a more affordable and youthful line, debuted in the hot Harajuku shopping district in Japan. It also plans to move into emerging markets like Russia, India, and Mexico.
Fifth and Pacific's earnings were held back by Juicy Couture, but jettisoning Juicy should hearten stockholders even if it doesn't gain a premium price. Its EPS was negative at $0.68, but hasn't stopped the stock from doubling since October thanks to the success of Kate Spade.
Also in Kate Spade's favor, the company has been quick to adopt e-commerce, with a 27% rise in direct to consumer sales pre-announced in January. Its Saturday line will only be available online, keeping the upscale cachet at the bricks and mortar stores.
The Gatsby trade
Ralph Lauren and Michael Kors are in Cramer's Great Gatsby basket, but be careful. Spoiler alert: things didn't end well for Gatsby as his high living attempt to win Daisy is cut short by his murder. Along similar lines, insiders keep selling Michael Kors, and Ralph Lauren may be becoming less relevant for younger shoppers.
Although the best value, Coach's North American sales are going to Kors, and with longtime CEO Lew Frankfort retiring it's a transition period for the company.
If Fifth and Pacific dumps Juicy then this company has clear sailing ahead for years of aspirational profits. Kate Spade grows more relevant every day with its online presence and international expansion.
AnnaLisa Kraft 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!