Looking at the stock market over the course of this year, you’d think happy times were here again. With consumer confidence hitting three-year highs, jobless figures decreasing, and unemployment dropping, it sure seems that we are now out of the economic woods. With a lot of money flowing into people’s investment portfolios, it is expected that some would want to live the high life and buy luxury goods. Companies like Coach, Inc. (NYSE:COH), Michael Kors Holdings Ltd (NYSE:KORS), and Tiffany & Co. (NYSE:TIF), have posted very good quarterly gains, as more people around the world are attracted to designer clothing, accessories, and jewelry. This is also attracting investors, as some companies are planning expansions into either new markets or new industries, looking to capitalize on the burst of profits.
Shoes with your handbag?
Probably the most historically successful luxury goods company is Coach, Inc. (NYSE:COH), maker of leather handbags. A traditionally strong profit maker, Coach has announced a push into other lines such as shoes and accessories, to accompany its famous tricked-out handbags. The stock jumped 4.9% so far in share price this year, which is a steady uptick, although it isn’t near the 20% uptick the S&P has experienced. The stock has also lagged well behind competitor Michael Kors.
The stock’s modest gains have unnerved some investors, especially upon management’s decision to expand into shoes, a highly competitive, but slow-growing market. The idea seems to be geared towards having shoes complement the famous handbags; a must for some women when going out (or so I am told). Many are worried this will result in a loss for the company, which has seen a slight downturn in net income this last quarter by $114 million, despite reporting earnings growth year-over-year of 6.2%.
With an operating income of around $348 million, an expansion into shoes will be cutting it close. Coach, Inc. (NYSE:COH) only took in $333.4 million on non-handbag goods last year, 7% of its income, and with the lofty expectation of $250 million in shoe earnings by June, it’s clear why Coach, Inc. (NYSE:COH) is having trouble convincing investors that it can be a player in the shoe game, which is much tougher than Coach’s bread-and-butter handbag business.
Michael Kors is killing it
The best-performing stock of these three is definitely Michael Kors Holdings Ltd (NYSE:KORS), which boasted a huge $0.50 per share increase last quarter in profits, as well as a 57% jump in revenue. These first five months have been very good to Michael Kors, which reflects in its 25% share price jump since the beginning of 2013, outpacing the S&P.
The company has decided, given the boost in profits, to double the expected number of European store openings to 200, as well as a similar increase in Asian stores. It is trying to tap into the rising middle class in Asia, and is perhaps anticipating a resurgence in the European economy very soon. North America will see expansion as well, but given that it is the home market for the company, it is already yielding good results with little room for expansion.
Michael Kors Holdings Ltd (NYSE:KORS) has become the fastest growing accessory brand in the United States, putting pressure on rival Coach, Inc. (NYSE:COH) to do one better. Its success probably influenced Coach’s decision to get into the shoe business. With same-store sales posting a 35% increase, Kors is building an ecosystem that sets the company up for the long term. The push into the rapidly growing Asian marketplace for designer luxury goods should provide a lot of help for the company’s bottom line as well.
According to the last annual report from 2012, Michael Kors recorded $147 million in net income, nearly double its 2011 earnings, and with a forward P/E ratio of about 20, it is getting more affordable for investors to scoop up, especially with the trailing P/E of around 34. This is a bigger spread than Coach, Inc. (NYSE:COH)’s P/E numbers, yet with global expansion in the pipeline, it may be easier to predict a good future for Michael Kors Holdings Ltd (NYSE:KORS) at this point.
Breakfast at Tiffany’s
The last of the three luxury stocks, Tiffany & Co. , surprised a lot of people by boosting earnings by $0.70 per share, even better than Michael Kors’ performance, even though its revenue jump of 9.3% this quarter was closer to Coach’s performance. This surprised a lot of people because Tiffany is a jewelry maker first and foremost. Few analysts thought such a store could perform this well given the still-sluggish economy.
Like Michael Kors Holdings Ltd (NYSE:KORS), Tiffany is looking into getting into the Asian markets to tap a growing middle class. Given the pedigree of the company, this shouldn’t be a tough market for Tiffany. It will have to continue to post strong numbers though, because North American sales are expected to slow, especially in the U.S. This is why the company has tempered expectations for the remainder of the year.
Tiffany is already closing in on its one-year target estimate of $79.39 per share (currently at around $78.47), but even with many analysts, including most recently Canaccord Genuity, saying it’s a sell, it appears that this overperformer has not peaked altogether yet. A forward P/E of 19.73 isn’t too far off either its trailing P/E of 24.17,or Michael Kors’ forward P/E, though the only slight drop shows that Tiffany’s investor value is catching up to where it should be, which is in line with the target estimate for the year.
The Foolish bottom line
Without a doubt, Michael Kors is the shiniest diamond in this necklace. A brilliant first five months for the company that included outpacing the S&P, and challenging Coach in the accessories market have not only given investors something to cheer about, but a bright future thanks to added investment in Asia and Europe. As the economy improves around the world, more luxury goods will be bought, and Michael Kors is making the investments necessary for diverse growth.
Coach, Inc. (NYSE:COH) may surprise its doubters if its estimates hold up, though it’s risky, and analysts aren’t that bullish on the prospect of Coach succeeding in shoes. Finally, Tiffany appears to be nearing the end of its surprise rally, given the dip in profit last quarter, although its strong Asian numbers may beat the Street’s estimate. Nonetheless, these companies have been glittering, helping their investors’ portfolios shine as well.
John McKenna has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach.
The article These Luxury Companies Will Make Your Portfolio a Runway Star originally appeared on Fool.com.
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