Question is, is luxury retail back in favor, or is this another head fake by Coach, Inc. (NYSE:COH)? Coach is notorious for rallying nicely, only to see its stock tumble shortly thereafter.
Coach, Inc. (NYSE:COH)’s recent performance could be a sign of things to come, especially on the back of a rebounding economy. The company plans to drive long-term growth with expansion of its global distribution model and tapping under-penetrated markets. Coach, Inc. (NYSE:COH) generated 32% of 2012 sales from outside the U.S., while also having a solid balance sheet with little debt. The retailer ended last quarter with cash of $858 million and total long-term debt of $23 million.
Management did take a cautious stance for the second half of fiscal 2013, expecting high single-digit sales growth, with flat North America comp sales. However, margins are expected to remain above the competition, with the full-year gross margin to come in at 73% and operating margin projected to be 31%.
What about other high-end retailers?
Ralph Lauren Corp (NYSE:RL) designs and distributes higher-end products, including men’s, women’s and children’s apparel, accessories, fragrances and home furnishings. The real benefit for Ralph Lauren Corp (NYSE:RL) investors is the fact that it has a robust international presence, namely in Asia. The company also intends to open about 60 stores in China by the end of fiscal 2015.
For fiscal 2013, the company expects net revenue to increase by 2%, lower than its previously guided range of 2% to 3%. However, the company now expects its operating margin to be better than previous guidance indicated, with growth in the range of 75 to 100 basis points, up from earlier guidance of 25 to 75 bps.
Fossil Inc (NASDAQ:FOSL) designs and distributes consumer fashion accessories, which include a line of men’s and women’s fashion watches and jewelry, handbags, leather goods, belts and sunglasses. Fossil Inc (NASDAQ:FOSL), much like both Coach, Inc. (NYSE:COH) and Ralph Lauren, has an impressive international presence, with stores in over 120 countries.
Fossil Inc (NASDAQ:FOSL) recently posted EPS of $5.39 per share, up 16.9% from last year’s earnings of $4.61 per share, but this still lagged management expectations of $5.42 to $5.45 per share. Fossil expects to have a solid 2013, with sales expected to increase 10% in the first quarter of 2013, and operating margins to be between 12.5% and 13.5% in the first quarter.
Tiffany & Co. (NYSE:TIF). is a jeweler that could be a takeover target. Like the other specialty and luxury retailers listed, Tiffany & Co. (NYSE:TIF) has a robust international presence, with half of its total sales generated internationally. This is part of the appeal that makes Tiffany and some of the other luxury retailers takeover candidates.
Gamco Investors’ CIO, Howard Ward, has also noted that “sooner or later someone will make a run at Tiffany & Co. (NYSE:TIF)…there are some obvious foreign luxury brand companies that would be interested.”
Bloomberg also reported back in January that Tiffany might be on the M&A radar. The most talked about potential acquirers include global luxury conglomerates, namely LVMH. The acquirer would get a strong American brand, while also being able to expand Tiffany & Co. (NYSE:TIF) in Asia and Europe. The same could be true for Coach.
Earlier this year, Bank of America Merrill Lynch’s quantitative analysts identified both Coach and Ralph Lauren Corp (NYSE:RL) as “attractive take-out candidates, given their relatively high free cash flow and manageable debt positions.”
Meanwhile, even without a buyout, it could be worth taking a look at Tiffany. The company expects EPS to increase 6%-9% in 2013 and forecasts total sales growth of 6%-8%.
The hedge fund trade
Going into 2013, hedge fund interest turned negative for Coach, Inc. (NYSE:COH), with 27 hedge funds long the stock, which is a 23% decrease from the third quarter. The major hedgies still invested in the stock include Discovery Capital Management, with a $104 million position that’s 1.5% of its 13F portfolio. Next to Discovery was billionaire Steve Cohen’s SAC Capital, with 0.8% of its portfolio invested in the company. On the flip side was billionaire Jim Simons’ Renaissance Technologies, which dumped the largest position of all the hedge funds (check out Simons’ tech picks).
Meanwhile, at the end of 2012, there were a total of 27 hedge funds also long Tiffany, which was an 8% increase from the third quarter. The top hedge fund manager was billionaire Nelson Peltz’s Train Partners, having a $58 million position that made up 2.4% of its 13F portfolio (check out Peltz’s top picks).
Compared to Coach’s 27 hedge fund owners, Fossil only had 17 going into 2013; however, Fossil’s top hedge fund owner is billionaire Steve Cohen of SAC Capital, with a $147 million position in the stock (see Cohen’s top consumer picks).
Don’t be fooled
Coach, Inc. (NYSE:COH) trades rather cheaply compared to peers and pays investors a 2.1% dividend yield. Coach is trading at only 15.5 times earnings, compared to Ralph Lauren’s 23 times, Fossil’s 17 times and Tiffany’s 22.4 times.
Meanwhile, Coach is an industry leader when it comes to generating returns, based on return on equity and return on assets.
| Coach | Ralph Lauren | Fossil | Tiffany | |
| Return on equity | 51% | 20% | 30% | 17% |
| Return on assets | 33% | 13% | 20% | 9.5% |
With a rebounding economy and strengthening disposable income, Coach should be one of the big beneficiaries in the industry. Despite its ups and downs over the past twelve months, the recent surge in the stock price could be here to stay.
The article Is Luxury Retail Back in Favor? originally appeared on Fool.com and is written by Marshall Hargrave.
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