High end…hands off!
PH.D student Yajin Wang, who worked on the experiment, explained:
“We found that a woman who is wearing luxury items and designer brands is perceived to have a more devoted partner and as a result other women are less likely to flirt with him. Regardless of who actually purchased the items, other women inferred that the man had something to do with it and is thus more devoted to her.”
I’m not saying I’m buying the premise wholesale, but there is a golden nugget of truth with a $250 billion luxury item market for American women. The study is certainly timely with Coach, Inc. (NYSE:COH) reporting earnings this week.
Such a deeply buried psychological impulse should be hard to discount, yet Coach, Inc. (NYSE:COH) hasn’t performed well this year, down 2.31%. It offers a 2.30% yield and has a trailing P/E of 16. The company raised the yield 13% in April and still, the stock doesn’t move like Michael Kors Holdings Ltd (NYSE:KORS), its inevitable comparison.
I have decried the glitziness of Michael Kors Holdings Ltd (NYSE:KORS) apparel, but now it all makes sense…even the most myopic can recognize a Kors purse from a distance. At least women can, which makes its apparel, jewelry, watches, and accessories all the more attractive as a signaling device. To mangle a Mark Twain quote, it’s like the difference between lightning and lightning bug.
Last year, Michael Kors Holdings Ltd (NYSE:KORS) was the name getting all of the Street’s love as the best performing IPO of 2011-12. The stock has performed well, up 56.49% over the last year. Its trailing P/E is twice that of Coach, Inc. (NYSE:COH) at 32.91 and its EV/EBITDA is 17.52, but the return on equity is a stunning 52.89%. The PEG of Michael Kors is 0.87, signaling it may be slightly undervalued with its higher growth profile.
Coach has a better gross margin of 74.12% to Michael Kors Holdings Ltd (NYSE:KORS)’ 60.22%, but Coach’s North American sales are going to Kors as The Wall Street Journal noted earlier this month. With no debt weighing it down, Kors continues its torrid pace of expansion as the company opened another 66 stores at the end of 2012 for a total of 237 retail stores.
Part of the problem with Coach may be all its outlet stores have actually made it a mass-market name as New York Magazine has charged and Cowan & Co analyst Faye Landes agrees. At the outlets, Coach, Inc. (NYSE:COH) accessories can run half what they cost retail. The company has 354 full-price stores to 169 outlet stores. While Michael Kors Holdings Ltd (NYSE:KORS) has a tier-two line that’s more affordable, called MICHAEL, it doesn’t affect its high end image since the company doesn’t have outlet stores. It’s not just that an item has to look expensive, it has to be expensive.
Coach, Inc. (NYSE:COH) does have a strong Asian presence with 300 retail venues in Hong Kong, Macau, Singapore, Japan, Taiwan, and China, with much of the success of the stock predicated on strong Asian sales. Its mens accessories also tend to perform better as economic status is not flaunted by cars or big houses. Also, with a business culture that runs on gifting but governments that frown on too conspicuous a display, Coach items are the perfect compromise.
Buy yourself something pretty
You may still be shaking your head. What about all the teenagers and single women, why are they buying themselves designer items? Wang further adds, “Many single women obviously want designer products, but instead of these products saying back off my current man, the single woman is saying back off my future man.”
While women don’t typically buy themselves rings, the conclusion still applies for watches and other forms of jewelry. Rivals assume that the woman’s partner bought it for her.
Tiffany & Co. (NYSE:TIF), the famed jeweler, has an unparalleled reputation worldwide. It’s been rumored to be a buyout target for years with several suitors bandied about such as French luxury company LVMH (Louis Vuitton Moet Hennessey). LVMH also owns a 17% stake in Hermes, maker of the Birkin bag, one of the most coveted purses around and costing thousands of dollars. Tiffany would certainly be a jewel in the crown for them.
But, Tiffany & Co. (NYSE:TIF) has been doing just fine, thank you very much. The company is celebrating its 175th anniversary this year with special promotions and also a Great Gatsby movie tie-in. Stifel upgraded it to a buy on July 15 with a $92 price target based on predicted success of the new Tiffany & Co. (NYSE:TIF) Sparklers line (the sparklier the better as a signal to romantic rivals!), and better domestic sales due to a bull market wealth effect.
I think that $92 may be optimistic as the median price target is $83.50, and revenue and EPS look to slightly surpass last year’s revenue of $3.75 billion and $3.27, respectively, with $2.13 billion in revenue and $2.07 EPS year to date. The company maintained its guidance for $3.53 diluted EPS, too.
Tiffany & Co. (NYSE:TIF)’s gross margin of 56.2% should begin to benefit from lower gold and silver prices, producing the majority of its pieces in-house. The company’s international sales have been strong this year, just reporting a Q1 increase of 9% for net sales globally and it’s looking to keep that going, opening 16 stores in the next year, of which only three will be in the U.S., adding to its total of 275 stores.
The stock is trading at a 24.35 trailing P/E with a 1.70% yield. However, its PEG at 1.82 is higher than both Michael Kors and Coach at 1.36.
What high end is signaling
Coach, Inc. (NYSE:COH) has overdone making the aspirational affordable. Sales in Asia will likely remain strong, but North American sales aren’t saying buy me. Michael Kors Holdings Ltd (NYSE:KORS) is still looking fierce by keeping it pricey and is undervalued relative to its growth. Tiffany & Co. (NYSE:TIF) is the most overvalued to growth, but the storied brand would probably not lose its luster.
The article Why High End Stocks Will Always Be in Style originally appeared on Fool.com and is written by AnnaLisa Kraft.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
