Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Luxury Stocks That Are Leading the Pack

Monday, November 26th, 2012
By for Profit Confidential

Luxury Stocks That Are Leading the PackIt will be interesting to see how the high-end luxury retailers performed on Black Friday. Given the uncertainty of the fiscal cliff, and its impact on taxes especially for the rich, the wealthy may hesitate to spend money at this point; but the economy needs spending. (Read “Why the Market Needs a Big Black Friday.”)

The share price of luxury stock Coach, Inc. (NYSE/COH) is down 25.6% from its 52-week high, as the retailer of high-end designer handbags and accessories is struggling to achieve the sales growth that helped to drive the stock from the $2.00 level in 2000.

Coach is facing some slowing in consumer spending at its factory stores, and if not for strong sales in China, the growth would be lower, according to the company. 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 in the luxury-brand stocks in the retail sector with higher-end consumers seemingly cutting back on spending.

The chart shows pausing and an unwillingness to bid the stock higher.

Coach Inc Chart

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Chart courtesy of www.StockCharts.com

Discount and big-box stores continue to do very well and, in my view, continue to be the space in the retail sector to make money.

Luxury retail stocks were on a tear in 2011, but have lost some luster amongst investors in the retail sector since then.

Luxury jeweler Tiffany & Co. (NYSE/TIF), after beating Thomson Financial consensus earnings-per-share (EPS) estimates in three straight quarters, has fallen short in the last three consecutive quarters.

While Coach and Tiffany face some growth issues in the retail sector, a retailer that is bucking the trend is high-end clothing retailer Michael Kors Holdings Limited (NYSE/KORS), which is estimated by Thomson Financial to report sales growth of 53.0% in fiscal 2013 and 30.2% in fiscal 2014. Michael Kors beat on Thomson Financial EPS estimates by 122% in its fiscal third quarter, 37.5% in the fiscal fourth quarter, 70.0% in the 2013 fiscal first quarter, and 22.5% in the most recent fiscal second quarter. The key with Michael Kors is consistency.

The stock debuted on December 15, 2011 and doubled in price before the recent weakness. Based on the operating results, KORS could be a special stock going forward in the retail sector.

Michael  Kors Holdings Chart

Chart courtesy of www.StockCharts.com

The key to investing in the retail sector is to search for companies that offer some sort of niche or a product that differentiates it from its competitors.

The luxury retail sector stocks are 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 both the new money and the old money.

In the short term, I think the money in the retail sector will likely be made with the discount and big-box stocks, but keep an eye on the luxury stocks in the emerging markets.

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George Leong - Financial Planner, ConsultantGeorge Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. Add George Leong to your Google+ circles