A Review of the Luxury Apparel Industry
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Some analysts view the luxury goods sector as being recession-proof. This has been the case for most of the years after the 2008 financial meltdown. But are these companies really armored against the current economic situation? The decline in China’s sales has been affecting most of the companies on the industry as sales in other regions such as Europe or US have been sluggish. It's important to pick stocks with high-quality business models. As mentioned in this interesting blog post, prominent investors like to select stocks with durable competitive advantages. So, luxury goods companies should take a look at their business models just in case this situation persists.
Let’s take a look at three companies in the luxury apparel market: PVH (NYSE: PVH), Michael Kors (NYSE: KORS) and Ralph Lauren (NYSE: RL). This could give investors a hint as to where the industry is heading amid slowing sales and if companies have solutions for it.
PVH: Costly acquisition but growing revenue
PVH is an American company that sells luxury apparel with a diversified brand portfolio that includes Calvin Klein, Tommy Hilfiger, Van Heusen and Arrow. PVH acquired Warnaco, a smaller apparel distributor in Feb. 2013 for $2.9 billion. This has bumped up costs for PVH as it spent $235 million in the integration, restructuring and debt modification of Warnaco and posted a net loss of $20 million for the year as compared to a net income of $95.5 million for 2012.
However, it's worth noting that the company's revenue for the latest quarter has increased 36% to $1.9 billion as compared to the prior year’s first quarter. Warnaco’s acquisition will give PVH a better distribution channel and more control over the Calvin Klein brand. This is seen as a good sign by the market, with PVH’s share surging more than 8% this week. I think that PVH has a great opportunity for future growth as the Warnaco acquisition costs have been deployed and now it can focus on developing synergies and expanding its Calvin Klein brand that will surely increase its short-term profits.
Michael Kors: Impressive results
Michael Kors is another luxury apparel brand with important geographical diversification: it has 191 stores in the US as well as 46 international stores. Its revenue is generated by its retail segment (48.1% of total revenue) and the wholesale segment (46.9% of total revenue). This company has been exhibiting outstanding revenue growth, going from $508 million in 2010 to $2.1 billion in 2013 for more than a 300% increase.
Its latest results also confirm the good moment that the company is enjoying: its net income rose 130% to $101 million, compared to the fourth quarter of 2012. Moreover, Kors has great margins as its income from operations stood at $630 million which signified a 28.9% of total revenue. The company is surely not feeling any economic slowdown. The company's stock has had its ups and downs in the past six months, but it has gained 23% since December 2012. This is another company that could be a great bet for the apparel sector. It has controlled costs which is an important factor when sales are declining, thus increasing its net income substantially.
Ralph Lauren: Slowing growth
Ralph Lauren is one of the leading luxury companies. It sells diverse goods including apparel, home products, accessories and fragrances. Although the company has posted profits of $127.2 million in the latest quarter of 2013 and showed a 35% increase against the same quarter last year, its stock has been declining at a steady pace for the past month. The company's shares have lost 7% so far, reaching $173.
Ralph Lauren seems to be the exception to the peer group analyzed. It has cut its growth guidance and forecasts revenue growth for 2014 to be around a "low-single-digit percentage." The company has warned over increasing costs as it expects its operating margin to fall by around 2%.
The company is still in good shape, but concerns have arisen over its poor revenue growth during the past year: revenue has grown by a mere 1% compared to the previous year, totaling $1.6 billion. It's possible that management’s strategy is oriented at giving a harsh guidance to produce a surprise in the coming quarters so that the company can benefit from the upside. According to I/B/E/S estimates, Ralph Lauren is expected to achieve a revenue of $7.62 billion for fiscal 2014.
Despite some data related to cuts in spending by Chinese consumers and the still struggling economic situation in Europe, the Dow Jones Luxury Index is up almost 30% from June 2012. This is certainly a good sign that confidence in this industry has not been lost for some investors. Most of the companies analyzed in this article have also increased their sales or profits and remain highly priced: Ralph Lauren is trading at 21 times its trailing price-to-earnings ratio, whereas Kors is at 30 times and PVH at 30.5 times. We can expect to see some arduous battles for the high-income consumers’ pie if things get complicated, however.
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Vanina Egea has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!