The shares of luxury stock Coach, Inc. (NYSE/COH) got sideswiped on Tuesday after the maker of high-end designer handbags and accessories fell short on its fiscal fourth-quarter sales. The company blamed the shortfall on lower-than-expected growth at factory stores. And if not for strong sales in China, the miss would have been much larger. China is extremely brand-conscious. Same-store sales from China grew at double digits versus a muted 1.7% in North America. The growing importance of Asia is critical, with 317 Coach stores in Asia versus 523 in North America.
The showing from Coach indicates the current stalling within the luxury brand stocks in the retail sector, with the higher-end consumers appearing to be cutting back spending.
The retail sector continues to be a difficult place to make money and requires careful attention and monitoring. There are trades to be made, but you need to be selective.
Discount and big-box stores continue to do very well and, in my view, continue to be the space where you can make money in the retail sector. The recent successful initial public offering (IPO) of Five Below, Inc. (NASDAQ/FIVE) demonstrated the continued strong appetite for discount retail stocks.
Luxury retail stocks were on a tear in 2011, but have lost their luster amongst investors.
Luxury jeweler Tiffany & Co. (NYSE/TIF), after beating earnings per share (EPS) estimates in three straight quarters, has now fallen short in the last two straight quarters. Trading at $55.00 on Tuesday, the stock fell to a post-IPO low of $49.72 on June 27 and is well below its post-IPO high of $80.99 on October 27, 2011.
While Coach and Tiffany face some growth issues in the retail sector, you cannot say the same for high-end clothing retailer Michael Kors Holdings Limited (NYSE/KORS), which is estimated to report sales growth of 36.9% in fiscal 2013 and 25.3% in fiscal 2014. Michael Kors beat on EPS estimates by 122.2% in its fiscal third quarter and by 37.5% in the fiscal fourth quarter. The stock debuted on December 15, 2011, and doubled in price before the recent weakness. Based on the operating results, Michael Kors could be a special stock going forward.
The key to investing in the retail sector is to search for a company that offers some sort of niche or a product that differentiates it from its competitors.
The luxury retail sector stocks represent a niche that has a growing target market with the newfound riches in the BRIC countries (Brazil, Russia, India, and China). These stocks tend to have strong global brand awareness and are sought after by the new rich and old money.
Yet, in the short-term, I think the money in the retail sector will likely be made with the discount and big-box stocks.