The Must-Own Luxury Stock
Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As we’re approaching the fiscal cliff, uncertainty about the market is mounting. Tax breaks will be expiring by year end and if the Fed doesn’t take appropriate actions, the US will be pushed back once again into recession—not as severe as the last one but nonetheless, a recession.
Unemployment is reaching its highs, crossing 8.2% at the moment. The Fed is printing money boosting inflation. QE3 has been announced and the Fed has started purchasing securities off the market thus pushing down interest rates. Various businesses, including auto makers, travel companies and luxury goods manufacturers, remain conservative in their next quarter guidance. If all this is not indicative of a slowdown, then God knows what is.
Recession is typically the worst for cyclical businesses. For them, economic slowdown means sales will go down and with each bad quarter will come stock price slumps. So, come a recession, luxury brands like Ralph Lauren (NYSE: RL), Coach (NYSE: COH), Tiffany’s (NYSE: TIF) and the latest IPO-star Michael Kors (NYSE: KORS) are likely to feel the most impact. To confirm this, see their historical price movements during past two recessions (part of the graph shown in grey). Michael Kors was IPO-ed only last year in December, hence the short trend line. The rest of the three luxury brands saw their prices plunging during recessions. Contrast their trend with that of Wal-Mart’s, where people shop for cheaper deals. Wal-Mart’s stock stayed defensive to both the recessions, remaining relatively stable during volatile stock markets than the cyclical luxury brands.
Two weeks ago when Burberry warned that its full year earnings will disappoint analysts, the stock slumped and with it took down almost all of the other major luxury industry stocks. On an annual basis, comparable-store sales for Burberry saw nil growth in the 10 weeks ended September. The global macroeconomic environment has lent to the luxury sector’s troubles. A Eurozone Crisis and economic slowdown in China and possibly the US, all pose a threat. But there’s one designer that’s faring well in this environment of high uncertainty.
Michael Kors (NYSE: KORS) hit a new high of $57.35 after it raised its full year earnings guidance to $1.39-$1.41, above its previous guidance of $1.32-$1.34 and above analysts’ estimates of $1.39. Last quarter also came with good news. Michael Kors beat analysts’ estimates and was able to achieve comparable-stores sales growth of over 36% which beats that of all of its major competitors. These attractive results were achieved through revenue growth at its stores and also through brand licensing. Additionally, the luxury brand was able to open more than 70 new stores.
One factor that I've noticed to be contributing to Michael Kors success is its wider target market. Contrarily, Burberry is losing because of its narrower target market--only the (super) elite. Then we've got Coach on the other end that is losing its luxury designer brand image in an effort to retain its customer base by lowering prices. But unlike the two peers, Michael Kors maintains its luxury brand image and its customers by offering varying product lines--the expensive high quality Michael Kors and a relatively cheaper Michael line. Another rewarding factor, in my view, is the brand's commercial appeal. Unlike Ralph Lauren and Burberry that choose to go for high aesthetics (read: complex designs made for the runways that an average customer doesn't understand), Michael Kors keeps simplicity and commerciality in mind. This was particularly noticeable at this year's NY Fashion Week.
After the Facebook debacle, investors' faith in IPOs has dwindled. But KORS is one IPO that shines bright amongst the rest of the dozens of IPOs this year. The stock has more than doubled in just 9 months. Its important fundamentals including Debt to Equity, Current Ratio, EPS Growth, Profit Margin are amongst the best in the industry. Market sentiments are generally bullish on the stock and this year's price target is set around $61. This is one luxury stock you would want to go long this year.
PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach and Tiffany & Co. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.