Luxury Retailer Stocks Primed for Holidays
Andrew Leckey

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Luxury retailers such as Coach Inc., in handbags and leather goods, and Tiffany & Co., in jewelry and specialty items, will likely continue to please their stockholders this holiday season, just as they have throughout much of the economic downturn.

It is one way that an average investor can benefit from spending patterns of the well-to-do.

These companies aren't infallible, but recent earnings have been strong and they have loyal customers who are under less economic pressure than most people. Their high-quality brands are expanding globally with more room to grow, especially in brand-conscious China.

"The high-end customers are the last to pull back on spending during an economic downturn, so these stocks do OK," observed Jason Asaeda, retail and brand analyst with S&P Capital IQ in New York. "The sector has been stable and growing, so I'm fairly optimistic about the holiday prospects."

New York-based Coach (COH) has hundreds of stores in North America, Japan and China. It is expanding internationally, a prime example being its first European flagship store launched this fall in London on New Bond Street. It is increasing its men's products throughout all its stores as well as through its dedicated men's stores.

The company has sometimes been underestimated because it used to be focused on the U.S. market. It attracts more "aspirational" customers than the very highest-priced luxury retailers because some of its products have lower prices.

"I really like the stock of Coach, which is doing well in the U.S., China and the rest of Asia," said Mark Mandel, specialty retail analyst with ThinkEquity LLC in New York. "It has done a great job of developing, designing and marketing products, and I think this is going to be a good holiday season for it."

Coach, whose stock is recommended by Mandel and Asaeda, does not mark down merchandise in its retail stores, they pointed out. The largest portion of goods in its factory outlet stores is designed for that discount purpose, and items sold in department stores are a different assortment than those in Coach stores.

"All the big publicly traded luxury goods companies are very international and are seeing strong growth," said Paul Swinand, equity analyst with Morningstar Inc. in Chicago, who also recommends Coach stock. "These companies hold up when the economy is tepid, though they are not totally immune in a disaster like 2008 when even luxury can hit the wall."

Tiffany (TIF), recommended by Asaeda, is another New York-based luxury retailer that does not mark down merchandise. Since the financial crisis, Tiffany has retained high-end consumers who buy its "statement" jewelry, a profit center that has remained strong. However, many U.S. customers who buy less over-the-top pieces haven't come back, Asaeda said.

Tiffany's "little blue box" commands a premium because of the firm's long-standing reputation. It has control of its supply chain because it is such a large buyer of diamonds. Tiffany at mid-year reported it had 236 stores that included 98 in the Americas, 55 in Japan, 52 in Asia-Pacific and 31 in Europe. It has significant growth potential in China and Europe and will, for example, open its first Eastern European store in Prague in 2012.

"For Coach and Tiffany, even if China's economy slows down, there are still additional geographies for them to tackle," said Swinand.

Paris-based LVMH Moet Hennessy Louis Vuitton SA (LVMUY), a luxury conglomerate whose handbag business has been struggling to keep up with strong demand, is also a favorite stock of Swinand. The company's stock price always drops when there are worries about Europe, as there have been this year, he said. A big part of its profits are derived from its champagne and spirits businesses.

"The strongest grower among luxury retailers is definitely Hermes International (RMS), but its stock is in the stratosphere and I would therefore not recommend going anywhere near it," said Swinand. "The company makes great products, has no debt and has fantastic returns on capital, but its stock price has been driven up by rumors of a buyout by LVMH Moet Hennessy Louis Vuitton" -- a possibility Hermes management does not want to come to fruition.

Seattle-based, high-end retailer Nordstrom Inc. (JWN) is still posting strong monthly comparable-store gains, Swinand said, though comparisons will get tougher after two years of such positive results. With the retailer's sales per square foot approaching all-time peak levels, the question is whether those can go up much more.

Successful reintroduction of the Nordstrom family into top management in 2000 revived the then-ailing company. Nordstrom turns inventory quickly, is careful about expansion and retains a reputation for customer service. However, it operates its own credit card business, which is not necessarily a plus in difficult economic periods, and the fashion apparel business is competitive and cyclical.

Retailing at any level has its risks, but brands known worldwide for quality and exclusivity will continue to grow in large part because emerging-market consumers are on a mission to seek out the "best" in everything. Luxury retailers in turn have potential to reward their shareholders even during worrisome times.