Luxury is back! With the continuing improvement in the U.S. economy, consumers are gradually becoming more willing to spend money on luxury items. For those who remember, manufacturers of luxury items enjoyed a huge rally for much of the 2000’s, then in 2008 when the economy tanked, anything that was not considered essential spending was regarded as a leper by the market. Tiffany & Co (NYSE:TIF) was no exception, finally bottoming at $16.70 in 2010, just about 22% of its current value. Clearly, the sky wasn’t actually falling and people still want nice things. If the economy continues to improve, like most analysts are suggesting, luxury manufacturers like Tiffany should do very well over the next few years.
Tiffany & Co. (NYSE:TIF)
Since the bottom in 2010, Tiffany’s revenues have come back with a vengeance, rising from $2.7 billion that year to over $4 billion expected for this year. The company is planning to open 15 new stores this year, adding to the 275 stores already open. Most of the company’s growth strategy is focused overseas, with seven of the new stores in Asia and three in Europe.
Currently, about half of Tiffany & Co. (NYSE:TIF)’s revenue comes from the U.S. and Canada, with Asia accounting for most of the rest. Europe is relatively underserved by Tiffany, which is surprising considering all of the fashion culture. This should provide a nice growth opportunity; especially if Europe’s economic issues get worked out in the coming years.
The Numbers
Other Ways to Play It
The obvious alternative is to pick another retailer of luxury goods, such as Signet Jewelers Ltd. (NYSE:SIG), which operates jewelry stores under the Kay Jewelers and Jared names. Signet trades at 16.3 times last year’s earnings, with 10.2% forward growth projected. Bear in mind, however, that Tiffany & Co. (NYSE:TIF) pays a higher dividend yield of around 1.7%, which is sure to appeal to income investors.
The less obvious and perhaps the safest play is one of the ETF’s that track consumer discretionary spending, such as the Consumer Discretionary Select Sector SPDR Fund. This is a great way to gain exposure to an increase in consumer spending without relying too much on any one company. The fund’s top holdings include Walt Disney, Home Depot, Comcast, McDonalds, Amazon.com, and others. The fund is up about 21% year-to-date and currently pays out 1.36% annually, with a very low expense ratio.
Conclusion
As far as individual names in the sector go, it’s hard to find a brand with the appeal, history, and growth potential of Tiffany & Co. (NYSE:TIF). Having said that, I’m tempted to say that the best long-term investment in the sector is with an ETF like the one mentioned. Retail stocks tend to be relatively volatile, and something like a less-than-stellar holiday season can derail the performance of any one company. Just look at the hit Coach took this past winter! With this ETF, you avoid those types of swings, and will be sure to benefit if this economic recovery is indeed real and sustainable.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Looking For The Best Play On Luxury Spending originally appeared on Fool.com.
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