Thursday, April 25th, 2013
By George Leong, B.Comm. for Profit Confidential
Spending on luxury goods appears to be back, and it?s full steam ahead.
Never mind the higher taxes on the rich and those earning over $400,000 annually; the more affluent members of our society appear to be spending lavishly in the retail sector.
Recall a recent discussion I had about the Shullman Luxury and Affluence Monthly Pulse and the fact that a majority of the luxury and affluent spenders are not influenced by the tax increases. (Read ?Higher Taxes: Who Cares? Not the Rich.?)
Well, guess what? Based on the results, high-end handbag maker Coach, Inc. (NYSE/COH) delivered strong numbers to shareholders, resulting in a surge in the stock?s price.
For the readers of Profit Confidential, I advised looking at Coach as a contrarian play in the retail sector after the stock fell to near its 52-week low.
The spike in the share price confirms this.
Take a look at Coach?s stock chart below. Notice the downside trading gap in January, when the stock plummeted to a low of $45.87 on February 24. The opening gap on Tuesday, as indicated by the blue oval in the chart, shows the jump and the move back toward the $60.00 level, according to my technical analysis.
Chart courtesy of?www.StockCharts.com
The thing about stocks like Coach and why I was intrigued by the prior valuation is the company?s strong global brand awareness in the luxury retail sector, which is critical. Companies, especially retailers, will always have bumps in the road, but as long as the brand is strong, buying on weakness when the masses of investors are dumping makes sense.
Driven by strong sales in China and other markets, Coach delivered excellent results in the retail sector. (Source: ?Coach Reports Third Quarter Earnings of $0.84, up 10% on a 7% Sales Increase,? Coach, Inc. web site, April 23, 2013.)
For Coach, sales in the North American retail sector jumped seven percent to $792 million in spite of a somewhat soft same-store sales increase of just one percent.
In the international retail sector, which accounted for about 32% of total sales, sales increased 14% on a constant currency basis.
What was intriguing was the strong growth in China?s retail sector in spite of what we had been hearing from other companies with exposure in China.
Sales in China surged 40% year-over-year, while the critical same-store sales reading was impressive with double-digit growth. According to the company, Coach has 118 locations in China, which will generate sales of about $425 million this year, or about 8.4% of the estimated $5.04 billion in sales based on Thomson Financial estimates.
While Coach is now worth a closer look with potentially more upside, the ?Best of Breed? in the luxury retail sector continues to be Michael Kors Holdings Limited (NYSE/KORS).
Chart courtesy of www.StockCharts.com
Michael Kors is estimated to grow its revenues by 63.4% in fiscal 2013, versus 6.9% for Coach in fiscal 2013, according to Thomson Financial consensus estimates. In fiscal 2014, Michael Kors is estimated to see revenues accelerate 32.6%, versus eight percent for Coach. The stock chart for Michael Kors above shows a downtrend, which I believe is not warranted and is worth a serious look.
So, happy shopping?and don?t forget your credit card.
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