When the financial crisis and Great Recession rocked the U.S.
and global economies back in 2008, it was supposed to be the death
knell for luxury goods companies and their stocks. After all, the
U.S. consumer was dying, the pundits said, and who buys
thousand-dollar handbags on their death bed?
But the last few years have shown that American consumers, while
taking blows, are alive and kicking. Americans have increased their
daily spending (not including normal household bills or purchases
of cars or homes) by about 30% since early 2009, according to a
recent Gallup poll, while government data shows that retail and
food service sales have well eclipsed their pre-recession highs.
Combine that resiliency with growing middle classes in emerging
market nations like China, and luxury goods companies have actually
fared pretty well recently. Designer bag and scarf designer Hermes
International said its first-half profit was up 28%; shoe and
clothing designer Salvatore Ferragamo's second-quarter net profit
rose 22.5%; and handbag and accessory maker Coach, Inc. (
), recently reported earnings were up 21% and revenues were up
about 15% for its 2012 fiscal year (ending June 30).
It was the third straight strong year for Coach, which upped
earnings 25% and sales about 15% in FY2011, and earnings 22% and
sales 12% in FY2010. The firm is one I've paid close attention to,
because my Warren Buffett-inspired Guru Strategy snatched up its
shares in early September 2009 -- a time when luxury goods stocks
were surrounded by fear. Since then, the stock has surged more than
100% as Coach has rebounded.
My Buffett-inspired model is still quite high on New York
City-based Coach ($17 billion market cap). The strategy looks for
firms with lengthy histories of earnings growth, manageable debt,
and high returns on equity (which is a sign of the "durable
competitive advantage" Buffett is known to seek). Coach delivers on
all fronts. Its earnings per share have dipped in only one year of
the past decade; it has just $1 million in long-term debt and more
than a $1 billion in annual earnings; and its 10-year average ROE
is an impressive 37.0%. Coach's shares are also reasonably priced,
trading at an earnings yield of about 5.9%.
The strategy I base on the writings of mutual fund great Peter
Lynch is also high on Coach. Lynch famously used the P/E-to-Growth
ratio to find bargain stocks, adjusting the "growth" portion of the
equation to include yield for dividend payers; yield-adjusted PEGs
below 1.0 are acceptable to my Lynch-based model. When we divide
Coach's 17 P/E ratio by the sum of its growth rate (17.1%, using an
average of the three-, four-, and five-year EPS growth rates) and
yield (2%), we get a yield-adjusted PEG of 0.89 -- a sign that the
stock is a bargain.
Coach isn't the only luxury goods stock my models like right
now. Here are a few others that make the grade.
Estee Lauder Companies (
This New York City-based maker of skin care, makeup, fragrances,
and hair care products is another favorite of my Lynch-based model.
A big reason is that it has been growing EPS at a 29.3% rate over
the long term. Lauder's shares look pricey, at 28.2 times earnings,
but its growth rate makes it worth the higher price tag -- the
stock's PEG comes in just under the model's limit, at 0.96. Another
reason the Lynch approach likes Lauder: The firm's debt/equity
ratio is a reasonable 47%.
Fossil, Inc. (
Texas-based Fossil makes a variety of watches, handbags, clothing,
and other accessories. Like Coach, the $5.2-billion-market-cap firm
gets strong interest from both my Buffett- and Lynch-based models.
My Buffett approach likes that Fossil's EPS have declined just once
in the past decade, and the fact that the firm has nearly three
times as much annual earnings ($298 million) as long-term debt
($106 million). Fossil also has averaged a 10-year return on equity
My Lynch-based model, meanwhile, likes Fossil's 30.4% long-term
EPS growth rate and 17.8 P/E, which make for a bargain-priced 0.58
PEG ratio. It also likes that the firm's debt/equity ratio is a
shade under 10%.
Guess? Inc. (
This Los Angeles-based firm makes trendy jeans and a variety of
other clothing and accessories. My Lynch-based model is high on the
$2.3-billion-market-cap company, thanks in part to its 39.2%
long-term EPS growth rate and 10.4 P/E, which make for a stellar
0.26 PEG ratio. The Lynch model also likes that Guess's debt/equity
ratio is a miniscule 0.99%.
Daimler AG (
The Germany-based car and truck maker counts one of the ultimate
luxury car brands -- Mercedes -- among its products. The
$53-billion-market-cap firm has posted strong growth the past
couple years even while Europe's economy has languished, and it
gets high marks from my James O'Shaughnessy-based value model. When
looking for value plays, O'Shaughnessy targeted large firms with
strong cash flows and high dividend yields. Daimler is plenty big
enough, and has an impressive $11.49 in cash flow per share (more
than eight times the market mean). Plus, it has a dividend yield of
5.9%, so it makes the grade.
I'm long GES.