By definition, the fate of consumer discretionary stocks at any given time is decided by how trendy the company is. Their businesses, after all, are subject to the discretion of consumers and we the people are notoriously fickle.
That trendiness can create a trap for investors looking for value, as the current state and prospects of two stocks in the sector that have been moving in opposite directions demonstrate.
The one-year charts for Tapestry (TPR), the holding company for the brands Coach, Kate Spade, and Stuart Weitzman, and Chipotle Mexican Grill (CMG), the fast-casual Mexican restaurant chain, could not look more different.
TPR has lost around forty percent over the last twelve months, while CMG has more than doubled:
To a contrarian like me, the obvious place to look for an investing opportunity is a situation like that is in the stock that has been beaten down, and the value metrics support that too. Tapestry has trailing and forward P/Es of 12.77 and 11.17 respectively, significantly lower than the market average and, on the surface, a lot more attractive than Chipotle’s 109.16 and 44.41.
Add in the fact that CMG pays no dividend while TPR will pay you over 4% and it is obvious where the value is ... or is it?
In some ways, both companies may appear to the American consumer to have reached a saturation point. Coach and Kate Spade seem to be in every mall, from the distinctly upmarket to outlet centers, and while Chipotle’s rapid growth hasn’t quite reached the McDonalds (MCD) point of one on every corner, they are now a pretty common sight.
The difference, though, is in their international prospects.
Tapestry’s brands have an established international presence. Their “affordable but aspirational” products have a following all around the world. Chipotle, on the other hand, has struggled to really take off outside North America. They have operations in Canada, the U.K., France and Germany, but ex-U.S. growth has been slow. The first international venture was in Canada in 2008, followed by the U.K. in 2010, France in 2012, and Germany in 2013 and they now have thirty overseas locations, with over half of those in Canada.
There are two ways of looking at that. One could say that it shows that the fascination with that particular type of Mexican food that is so common in the U.S. is just not found elsewhere and that the prospects are therefore limited.
Or it can be seen as admirable restraint that still leaves significant room for growth.
As somebody who flirted with the idea of buying the U.K. franchising rights to Subway, now the largest U.K. fast food franchise, in the early 1990s, only to be told by potential investors that it wouldn’t work because "English people don’t eat that kind of sandwich," I am skeptical of the argument that people won't want to eat a certain kind of food.
As Steve Jobs once said, “people don’t know what they want until you show it to them.”
While both companies now have quite mature businesses in the U.S., Chipotle has much more potential for growth elsewhere. That doesn’t mean that Tapestry can’t increase earnings, nor that the stock can’t recover. They can and it might, but the upside is limited for fashion brands that are no longer the flavor of the month. On the other hand, there is an established history of American food chains overcoming initial resistance to flourish in other markets.
Essentially, when looking at stock in Tapestry and Chipotle, it comes down to the old argument about growth versus value. I would usually favor value in that debate as securities tend to revert to the mean, but in both of these cases, the current trajectory of the stocks looks set to continue for a while, so CMG is by far the better bet of the two.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
