Is Luxury a Liability in 2013?

by James Brumley | January 14, 2013 9:56 am

When one luxury brand stumbles, the market might see it as nothing more than a mere curiosity. But when two luxury brands start to struggle, investors become rightfully concerned.

Coach (NYSE:COH[1]) and Tiffany & Co. (NYSE:TIF[2]) are the most recent duo of high-end goods makers to spook the market around the same time, at least partially spurred by reports and rumors of tepid December sales. Was it just coincidental that both stocks have been struggling of late, or are consumers really starting to dial back on premium purchases? If it’s the latter, then more of these luxury stocks are in trouble.

By the Numbers

The official numbers aren’t in yet, but Tiffany warned us late last week to not expect much when it comes out with fiscal 2012 results — they’re going to roll in at the low end of prior guidance once the year closes at the end of January.

The most recent range was between $3.20 and $3.40 per share, so any figure at all would fall short of last year’s profit of $3.60. But, now that we know something closer to $3.20 is in the cards rather than a $3.40-ish number, any lingering market optimism for the stake was quelled last week.

The named culprit? Weak holiday shopping, with a pinch of missed earnings estimates. If the company doesn’t earn $1.40 per share for its fourth quarter, it will be the fifth straight miss TIF has suffered.

Coach has been hammered since March, falling from a peak of $79.70 then to lows around $54 by August, where it has stayed ever since. Investors are concerned that the slow disintegration of the economy is quietly steering consumers away from splurge purchases like nice handbags … the kind where the label costs more than the bag itself.

Fossil (NASDAQ:FOSL[3]) is another high-end (OK, high-ish-end) name that suggested luxury spending was fading when it fell 4% short of sales forecasts[4] last quarter. It was Europe’s woes that caused the most trouble for the watchmaker. It’s not a stretch to assume what’s bad for the goose is also bad for the gander, meaning if Fossil is struggling there, then odds are Coach and Tiffany are, too.

Funny thing about jumping to conclusions, though — sometimes that’s a huge mistake.

The Rest of the Numbers

Before you freak out about the headlines and media spin, it might be worth a closer look at the numbers that don’t quite jive with the demise of luxury spending.

Take Coach, for instance. Yeah, it allegedly has been under fire for nearly a year based on fears of stumbling sales. But the last three quarters’ per-share earnings not only topped estimates — they were bigger than the year-ago figures in all three cases. If Coach is in trouble, there’s no evidence of it yet.

Tiffany didn’t get crushed this past holiday season, either. Its North American segment actually saw a sales increase of 3%, just a tad off from the prior year’s improvement of 4%. Asian holiday sales slumped from a 19% improvement in 2011 to “only” a 13% increase for 2012.

It’s Tiffany’s European sales, however, that indirectly offer the most hope of all for luxury retailers. How so? Tiffany’s holiday sales in Europe were up 2%, versus only gaining 1% a year earlier. No, 2% isn’t much, but it’s Europe — the continent that’s in such dire financial straits that it’s supposed to be proverbially falling into the ocean.

And just for the record: Although Coach has yet to post official Q4 numbers, the company saw an 8% increase in domestic revenue and a 15% rise in foreign sales in calendar Q3. China drove the biggest sales increase, with a 40% improvement.

And the Point Is?

Investors can take away a couple of things here:

The first is simply that these luxury names aren’t necessarily hitting the wall that the headlines would make you think. It’s not uncommon for consumers to say one thing and do another. Most everyone says they’re cutting back on spending; few consumers actually do it. And consumers who shop at Tiffany’s or Coach tend to cut back even less than the norm.

The second dose of reality that investors might want to absorb is that the media loves to connect logical dots. In this instance, the logical dots consisted of the fiscal cliff (which means high-earners will be taxed more) and luxury goods retailers (who rely on high earners to generate sales). It seems logical that if this demographic is handing over more dollars to the government, then it’ll have less to fork over for Coach purses and Tiffany jewelry. Problem: There’s only flimsy empirical evidence suggesting the affluent sweat paying a little more in taxes, and take it out of the shopping budget to do so.

More than that, with the fiscal cliff crisis averted — allegedly the reason purse strings were drawn so tight in the first place — if anybody truly was holding back until there was some clarity on the front, they’ve got that needed clarity now.

But what about the waning growth numbers for some luxury names in some locales (like the U.S. in particular)? To give credit where it’s due, Jim Cramer[5] and Divine Capital Markets’ Danielle Hughes[6] might be on the right track with Tiffany’s woes, suggesting the company simply isn’t giving American consumers what they want. Flashy jewelry and beautiful handbags can’t compete with iPads and new cars, both of which are selling quite firmly. Apple (NASDAQ:AAPL[7]) and relative newcomer Michael Kors (NYSE:KORS[8]) are giving shoppers what they want in the United States, where tastes differ a bit from Asia’s and Europe’s preferences.

Bottom line? Luxury spending isn’t fading. It’s just being redirected, especially in the U.S. Investors just need to make sure their luxury names are the ones in touch with consumers.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. COH:
  2. TIF:
  3. FOSL:
  4. fell 4% short of sales forecasts:
  5. Jim Cramer:
  6. Danielle Hughes:
  7. AAPL:
  8. KORS:

Source URL:
Short URL: