Luxury brands continue to do well as the consumer rebounds. These brands are finding new consumers in the international marketplace. In addition, men are the new target for luxury brands as men seem to have developed an eye for fashion. Both Tiffany (TIF) and Coach (COH) are listed in the top 50 brands in the U.S., as published by Interbrand in the “Best Retail Brands 2012.” Both of these stocks are considered strong buys especially if we get a market pullback.
Tiffany & Co. (TIF) continues to flourish where many luxury goods have struggled. Store expansion continued in 2011 with the restraint and discipline befitting a luxury brand. The brand has been able to successfully offset rising commodity costs through increased merchandise pricing. Active in both product development and promotions, Tiffany’s successful multimedia campaign “What Makes Love True?” was recognized as a best-in-class example of a luxury retailer using digital. The company’s increasing focus on environmental and social leadership is a growing component of the brand; it is clear about its diamond supply chain partners and practices. The appeal of the iconic blue box is universal, as demonstrated by Tiffany’s continued international growth.
Globally, we believe the Tiffany & Co. brand is under-penetrated, presenting TIF with ample growth opportunities. Through selective retail and e-commerce expansion in the Americas, Europe and the Asia-Pacific, and new product introductions, we see net sales reaching $3.64 billion in FY 12 (Jan.) and $3.93 billion in FY 13. TIF reported a 7% increase in worldwide net sales for the November-December holiday period, below our 11% growth projection. On a
constant-currency basis, same-store sales rose 4%, reflecting gains of 2% in the Americas, 12% in the Asia-Pacific, and 6% in Japan, and a decline of 4% in
Europe. While sales have weakened markedly in Europe and in the eastern U.S. (particularly markets that have a high customer concentration tied to Wall
Street) in recent months, given our view of the company’s leadership in U.S. high-end jewelry retailing, its growing brand awareness and market penetration
in Continental Europe and the AsiaPacific, its improving operating efficiencies, and its compelling valuation, we think TIF remains an attractive long-term investment. TIF has increased annual dividends each year since 2003 and has a current yield of 1.71% based on a 31% payout ratio. TIF has a Dividend Growth 5 Year Average of 23.73%.
A consistently renowned American heritage brand of accessible and aspirational luxury with high positive social media scores, Coach (COH) has 500 stores in the U.S and Canada and enjoys an evergrowing presence globally, most recently entering Brazil and Vietnam. The company is experiencing tremendous growth in China due to the explosion of middle income families who aspire to higher-end brands. To protect its brand, Coach initiated a major crackdown on counterfeiters and trademark infringers. It also created a new brand, Reed Krakoff, to deliver a slightly different design aesthetic at a higher price point. All things related to the brand filter through Coach’s executive creative officer to keep brand focus sharp. The result is continued double-digit growth. In FY 11 (Jun.), COH estimated the U.S. addressable market for women’s accessories and handbags grew to 10%, to $9.3 billion as the company grew more rapidly, expanding its domestic market share. A re-emphasis on Coach Men’s also doubled the business to about $200 million, and a focus on expanding Asian distribution increased COH’s market share in China to 6%, or $185 million. We see favorable long-term sales and earnings prospects for COH, as much based on management’s acumen as on global brand potential.
While sales of $400+ handbags weakened in the December quarter, North American comparable-store sales rose a strong 8.8% on top of a year-ago 12.6% gain. We view the company’s core $198 and $298 price points, which we believe appeal to broad range of shoppers spanning the high-end to value, and frequent in-flow of new products as competitive advantages. We also see a growing retail business in Asia and further development of Coach Men’s expanding COH’s global market opportunity.
In the five years through FY 11, COH posted a revenue compound annual growth rate (CAGR) of 15%, a gross profit CAGR of 14%, an EBIT CAGR of 13%, and an income from continuing operations CAGR of 14%. Total assets rose at a five-year CAGR of 10%. Capital expenditures were $148 million in FY 11, up from $80 million in FY 10, and for FY 12 COH estimates a $200 million capital budget, supporting global store expansion and investments in technology. COH’s returns on assets, capital and equity exhibited substantial improvement in FY 10, posting gains of 340 bps to 680 bps. FY 11 returns were 32% for ROA, 52% for ROC, and 57% for ROE, and were at the top of the peer group. We expect COH to maintain industry leading financial and operational metrics, and we regard the COH management team as excellent brand stewards that uphold strong operating disciplines, and we forecast incremental improvements in gross margin along with SG&A leverage on increasing scale over the long term. COH has increased annual dividends each year since beginning payments in 2009. COH has a current yield of 1.18% based on a 25% payout ratio.