Thanks to the recovering U.S. economy, investor confidence in North American institutions stood at 95.5% while the global investor confidence stood at 88%. Meanwhile, the Fed’s monthly liquidity injections have driven the U.S consumer comfort index (by Bloomberg) to five-year highs, and consumer spending has risen 21% over the last five years. It’s an age old thesis that when the faith in an economy is restored, luxury stocks do well, and here are a few handpicked companies that seem well positioned to grow.
Profiting from apparels
Ralph Lauren Corp (NYSE:RL) is one of the leading premium apparel brands, catering exclusively to the upper class. The company operates with around 380 stores, which include its Ralph Lauren stores, Club Monaco stores, and Polo Factory stores. Thanks to its well established brand image, the apparel brand charges a hefty premium for its offerings and enjoys a gross margin of 59.3%. However, its hefty marketing and advertising campaigns eat into its earnings and leave its net margins at just 10.36%.
To improve its profitability, Ralph Lauren Corp (NYSE:RL) closed 95 distribution points in China last year against the planned closure of 65 points. Its management explained that this move may shrink its revenue over the short-term, but would prove vital in expanding its margins in the long run. However, to make up for lost sales, Ralph Lauren is planning to open 60 new stores in China by 2014, which would be located in premium locations with greater footfall of high net worth individuals.
As of now, China accounts for 20% of the global luxury market and is expected to account for 33% by 2015, but Ralph Lauren generates just 14% of its revenue from the country. Naturally, the aggressive store openings in China would increase its revenue share from the world’s largest populated country, and management believes that China holds the key to its growth. But Ralph Lauren Corp (NYSE:RL) isn’t alone in the race.
More opportunities
Coach, Inc. (NYSE:COH) currently operates with 125 stores in China, and plans to open 30 new stores in the coming quarter. Besides the 31% store addition, the company is planning to increase its square footage in the country by 35%. Furthermore, the company is planning to open 10 new stores in Japan and 25 new stores in North American nations.
However, Coach generated just 7% of its total revenue from China in FY12, and the bulk of its expansions are planned for the country. Once these new store openings are complete, analysts estimate that China would account for around 11% of its total revenue. Besides that, Coach, Inc. (NYSE:COH) has also launched an e-commerce portal in China, which should further drive up its revenue with minimal costs (of showrooms).
Even Michael Kors Holdings Ltd (NYSE:KORS) is counting on China. The company currently operates with less than 300 stores and is aiming to open 100 new stores in China. Once its store openings in China are complete, Michael Kors would be able to generate around 40% of its overall revenue from the country. This makes it the most leveraged play (towards China) among the discussed companies, and as a result, analysts estimate its annual EPS to grow by 32.63% over the next five years.
Conclusion
All the mentioned companies have been reporting impressive growth, and to retain the growth momentum, their expansion in China is important. At the current prices, none of the companies appears to be a bargain, but analysts expect them (especially Michael Kors Holdings Ltd (NYSE:KORS)) to grow at a rapid pace.
With that in mind, holding all three companies in a portfolio would have a collective annual EPS growth estimate of 20.07%, and initiating long positions with a systematic investment plan would be the best strategy.
The article 3 Stocks That Seem Poised to Rally originally appeared on Fool.com.
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