2 Luxury Stocks Set to Outperform

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

Its a well-known fact that luxury stocks outperform the market when global economies are recovering. This resonates with the current macro economic situation. Both consumer confidence and personal disposable income are on the rise, which is steadily translating into higher consumer spending. This is the reason that luxury companies have performed well over the last year, and will most likely continue to soar.

Jewelry stores

To begin, Tiffany (NYSE: TIF) is a leading jewelry chain based in the U.S., which dons a market cap in excess of $10 billion. Its shares have risen by nearly 40% YTD, outperforming most indices around the globe. Yet, analysts estimate its annual EPS growth to average around 11.7% for the next five years.

But, the Japanese Yen has depreciated by nearly 20% over the last quarter, which somewhat changes the equation. As of now, Tiffany generates 17% of its total revenue from Japan, and the Yen’s recent depreciation should shrink its overall revenue by 3.4%. But, that doesn’t call for shorts.

During the recent quarter, Tiffany increased its store area in Japan by 20%, which offset losses caused by the depreciating Yen. Besides, Tiffany has also been reporting impressive sales growth in most of its markets, especially in Asia-Pacific. Its quarterly sales from Asia-Pacific grew by 14.5%, while even the financially troubled Europe reported a 6% quarterly sales growth.

With a modest debt/equity ratio of 37% and a healthy current ratio of 5.33 times, Tiffany sports a clean balance sheet. And, to investors’ delight, its shares yield 1.72% with a modest payout ratio of 38.89%. Analysts at Oppenheimer estimate its fair price to be $85, which still calls for a 10% upside.

Apparel stores

Michael Kors (NYSE: KORS) has been one of the most consistent, yet explosive, U.S.-based luxury stocks. Its annual EPS has grown by 121% during the past five years, and analysts still estimate its annual EPS to average around 28.7% for the next five years.

For the recent quarter, Michael Kors posted a 52% revenue growth in North America, while European nations reported an impressive 97% revenue growth. Meanwhile, the company opened just three new outlets in the U.S. and one new outlet in Europe. Its revenue surge can be attributed to impressive growth in its quarterly same store sales and 500 store conversions in FY13.

In my opinion, organic growth is always better than inorganic growth.

Besides that, its 231 store locations in North America generated 86.5% of its total revenue, while European nations accounted for 11.7% of total revenue. However, Japan contributed just 1.1% to its overall top line, and the minimal exposure to the country reduces risks posed by Yen depreciation.

The company operates with little or no debt, sports a healthy current ratio of 4.81 times, and enjoys an ROE of 52.35%, which altogether point toward a solid balance sheet. Analysts at Canaccord Genuity have a price target of $86 per share for Michael Kors.

A company to miss?

Not all luxury stocks offer staggering returns. Although Coach (NYSE: COH) has yielded hefty returns in the past, its shares have remained flat over the last year. The company generates around 20% of its overall revenue from Japan, which has dampened its overall growth. This is after Coach closed down 20 of its stores in Japan last year.

For the recent quarter, the company posted a 5.8% increase in profits, while its revenue beat the Street’s estimates by 0.8%. On a constant currency basis, its quarterly international sales rose by an impressive 14%. However, Forex fluctuations and a depreciating Yen resulted in a net sales growth of 6% (an erosion of 800 bps). Hence, analysts at UBS have a neutral rating for Coach, with a price target of $59 per share.

Final words

Among the mentioned companies, only Coach appears to be undervalued. But, this is because its shares have largely remained flat over the last year. Although Coach is rapidly growing in China and has solid growth prospects, the bottom line remains that Forex losses are eroding gains.

With that said, I think investors should consider Michael Kors and Tiffany due to their minimal exposure in Japan. Their shares may appear to be fairly valued, but that's because both companies have stellar growth momentum. Despite their fair valuations, analysts believe that Tiffany and Michael Kors offer significant upside due to their aggressive expansion plans and impressive same-store sales growth.

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.

Piyush Arora 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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