Strong Results Across the Retail Spectrum; Brands Are in Vogue
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Tuesday morning before the bell, three retailers reported strong results across all spectrums, sparking a renewed faith in consumer spending. Interestingly enough, though the three are distinctly unique, the results of all three underscore the shift towards luxury and brand names we’ve spoken to many times before.
Michael Kors (NYSE: KORS), a maker of affordable luxury handbags, clothes and accessories, reported excellent earnings for its fiscal year 2013 first quarter. Revenue grew 71% to $425 million, led by new stores and 38% same-store sales growth in North America. The revenue was significantly higher than the consensus estimate. Earnings were also much better than the Street predicted, growing 162% year-over-year to $0.34 per share, exceeding estimates by $0.14. The firm also expects to earn $1.32-$1.34 during its second quarter on revenue of $490 million to $500 million. We’re big fans of Michael Kors’ ability to steal share from competitors like Coach (NYSE: COH) and think the firm, which has a great market position and high perceived quality, will continue to perform well in coming periods. Coach reported paltry North American same-store sales growth of 1% in its most recent quarter. As with Lululemon, Michael Kors appeals to the middle class luxury buyer, which has been holding up well in this economy.
Saks (NYSE: SKS) also reported better-than-expected bottom-line results, which speak to the continued strength in luxury retail. Revenue of $701 million for the second quarter grew 5.1% thanks to a 4.7% increase in same-store sales, roughly in-line with expectations. Unlike a fast grower like Michael Kors, Saks’ growth is driven primarily by improving store productivity rather than opening new doors. The firm was much larger just a few years ago, but even malls in several wealthy suburbs have been unable to handle the luxury giant. Still, the firm’s loss of $0.05 per share during the quarter was better than the Street predicted. Although we’re positive on the company’s ability to increase productivity, we do not think Saks has the same growth strategy with 'Saks Off 5th' that peer Nordstrom has with Nordstrom Rack. We think shares of Saks are fairly valued at current levels on the basis of our discounted cash flow model.
Even though TJ Maxx (NYSE: TJX) tends to attract lower-income consumers, its results also reflect the trend toward luxury brands. TJ Maxx and its other chain, Marshall’s, often purchase large amounts of excess inventory from popular brands to sell them at thin margins. The firm’s fiscal year 2013 second quarter earnings grew 24% year-over-year to $0.56 per share, slightly better than consensus estimates. Revenue was also quite strong, growing 9% year-over-year to $5.9 billion. Same-store sales at Marmaxx (TJ Maxx/Marshall’s) grew 7%, though the company forecasts just 2-4% consolidated same-store sales growth for fiscal year 2013, as well as earnings of $2.39-$2.45.
Even if TJ Maxx’s conservative outlook for the back-half of 2013 proves to be accurate, the firm is still outpacing rivals with similar price-points such as Kohl’s and JC Penney. Consumers continue to prefer higher perceived quality brands like Ralph Lauren and Nike than private label offerings from other retailers. The demand for brands is at an all-time high, which is why we tend to like TJ Maxx and Ross Stores and question the long-term position of Kohl’s and JC Penney.
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