Coach
is still the cheapest luxury retailer
In the retail industry, we should take a close look at how quickly the company turns its receivables and inventory into cash, measured by cash conversion cycle. The lower the ratio, the more quickly the operation can generate cash, which is what investors want to see in a company. Michael Kors seems to have the most efficient operation with the lowest CCC at only 92 days. Coach’s CCC is higher at nearly 113 days while Tiffany & Co. (NYSE:TIF)’s CCC is extremely high, at nearly 473 days.
When it comes to jewelry, consumers think of Tiffany & Co. (NYSE:TIF). According to recent Digital Luxury Group research, Tiffany & Co. (NYSE:TIF) has ranked at the top in the most searched-for jewelry brands. Its collection, “Return on Tiffany & Co. (NYSE:TIF)” is also the most searched-for jewelry collections in the U.S. In the first quarter 2013, Tiffany & Co. (NYSE:TIF) experienced high comparable-store sales growth of 8% worldwide. It also had sales growth in all geographical regions including the Americas (6%), Asia-Pacific (15%), Japan (2%) and Europe (6%). The company estimated to generate around $3.43 to $3.53 per diluted share in the full year 2013, with the worldwide revenue growth at a mid-single-digit percentage in U.S. dollars.
What I like about Coach is its lowest valuation among the three companies. At $57.50 per share, Coach is worth around $16.1 billion. The market values Coach at only 9 times EV/EBITDA.
EV/EBITDA represents enterprise value/earnings before interest, taxes, depreciation and amortization. It is an important concept of business valuation as it takes into account the relationship between the market value, the debt level, cash position and the cash flow of a business. The lower the ratio, the cheaper the stock.
Tiffany is trading around $77.90 per share, with the total market cap of $9.95 billion. At 11.84 times EV/EBITDA, it has a higher valuation than Coach. Among the three, Michael Kors is the most expensively valued. At $61.90 per share, it was worth around $12.4 billion on the market. The market values Michael Kors at 17.73 times EV/EBITDA.
My Foolish take
Michael Kors seems to grow quite fast with great operating performance and high profitability. However, it is valued at a premium. Among the three companies, I like Coach the most with its lowest valuation and similar high return on invested capital compared to Michael Kors. Moreover, the fast-growing Chinese market could benefit Coach in the long run.
Anh HOANG owns shares of Coach. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Profitable Luxury Retailer Is Still Cheap originally appeared on Fool.com is written by Anh HOANG.
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