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4 Luxury Goods Companies to Track in 2012

March 07, 2012 | About:
With an improving economy and jobs numbers, it would be natural for investors to consider jumping into the luxury goods sector. However, one must use caution, as these stocks might look better on the outside than inside. While some of the luxury goods companies below are facing headwinds such as pitiful year-end sales numbers and above-average trading prices for this industry, others are experiencing positive drivers like record sales and earnings growth, a promising strategic growth plan, and a strong balance sheet. In this article, I will focus on four luxury goods companies to see whether they present any opportunities for investment at this time. As always, please use my analysis as a starting point to do your own research before making any investment decisions.

Tiffany (TIF) is a brand recognized around the world for its fine jewelry and other luxury goods.

The company recently reported that holiday sales for the two months that ended Dec. 31 were up seven percent from the same period 2010. Despite the year-over-year increase, trouble appeared on the horizon after strong consistent U.S. sales growth for 2011's first three quarters stumbled at the end of the year. Michael J. Kowalski, chairman and CEO, announced amended lowered guidance from November's estimate for the fiscal year that ended Jan. 31, 2012. The previous forecast was for $3.70 - 3.80 EPS but was reduced to $3.60 - 3.65. However, it is still better than March 2011 guidance of $3.35 - 3.45 for the year. Looking ahead, Tiffany's announced it signed an agreement for a joint venture with Damas Jewelry to operate Tiffany & Co. stores in the United Arab Emirates.

The stock has a current PE of 19.35 and PEG ratio of 1.19. The stock most recently closed at $66.28 approximately 21 percent down from its 52-week high of $84.49. The company pays a dividend of 1.16 (1.8%) and does have a strong balance sheet. Analyst recommendations come in at a lukewarm 2.3 on the 5-point scale with median target price at $75 and high target at $88. With a beta of 1.7 the stock is more volatile than the overall market and has exhibited extreme price swings since hitting the year's high in July with no consistent upward trend to recover the high water mark. The year-end drop off in the sales momentum could be a red flag. The company expects to report its financial results for the fourth quarter and year ending January 31, 2012 on March 20, 2012. Approach Tiffany as if you're purchasing its merchandise -- with caution.

Coach (COH) is another well-known status symbol brand that offers consumers high-quality bags, accessories, footwear, business cases and other specialty items. It has stores in North America, Japan, Macau and China along with catalog and e-commerce sales plus wholesale distribution in 20 countries.

The stock last closed at $75.03 close to its 52-week high of $76.60. Current PE stands at 23.49 with a PEG ratio of 1.33 compared to sector averages of 15.46 and .93 - putting the stock's pricing higher than its competitors. The stock pays a dividend of 22 cents per share. Analyst recommendation is at 2.1 toward the buy side with a median target of $78 and potential high of $93. The company reports a profit margin of 21.22 percent and operating margin of 30.99 percent. The stock is currently trading well above its 50-day and 200-day averages of $67.68 and 60.78 respectively. It has a strong balance sheet with little debt compared to assets.

The company just reported good 2011 Q2 (ending Dec. 31) earnings. Sales for the quarter were $1.45 billion up from $1.26 from the same quarter 2010 - an increase of 15 percent. Gross margin remained strong too at 72.2 percent compared to 2010's 72.4 percent. Earnings per share were up 17 percent to $1.90 from $1.62 from the same period 2010. Same store American sales increased 8.8 percent, Japan sales were even (during a disastrous year for that country) and China sales remained strong. Sales of men's products doubled to $200 million for the fiscal year ending June 2011, and CEO Lew Frankfort said the company expects to double that number again for fiscal year 2012.

The company's robust growth justifies its above average industry PE and PEG. The company appears to be on track for continued growth with the stock in a fairly consistent upward trend since bottoming during late summer's market slump. With the stock trading close to its 52-week high, I recommend waiting for pullbacks to start or add to a position.

Nordstrom (JWN) is a specialty fashion retailer that offers brand name apparel, cosmetics, shoes and accessories for women, men and children. Most recently, the stock closed at $51.14 close to its 52-week high of $53.35. With a PE of 16.58 and PEG ratio of 1.26, the stock is priced slightly higher than the industry averages.

The company just released a record earnings report with net earnings of $236 million, or $1.11 per diluted share, for the fourth quarter ended January 28, 2012. This represented an increase of 1.7 percent compared with net earnings of $232 million, or $1.04 per diluted share, for the same quarter last year. Same-store sales for Q4 2011 were up 7.1 percent and net sales for the quarter up 12.5 percent compared to 2010. Sales for 2011 were the highest the company ever reported and marked two consecutive years with 13 percent annual growth.

Nordstrom was recently cited in a Forbes report for its strategy to target younger customers and for plans to invest significant capital resources this coming year in e-commerce sales.

The stock most recently closed at $51.14 close to its 52-week high of $53.35. It's PE of 16.58 and PEG of 1.26 are slightly above the industry averages. Analyst recommendation is a lukewarm 2.5 out 5 with a median target of $54.50 and high target of $62.00

The company has a strong balance sheet though operating margins seem slim with profit margin at 6.45 percent and operating at 11.76.

Besides record sales and a strategic growth plan, the company recently announced a stock re-purchase plan of up to $800 millionalong with a dividend of 27 cents per share, an increase of 17% over the previous quarter. The stock buyback along with a dividend increase is a bullish sign from the company. Value investors should wait for pullbacks since the stock is close to its 52-week high.

Lululemon Athletica, Inc. (LULU) designs, manufactures and distributes athletic apparel and accessories aimed at the youth markets in Canada, the U.S. and Australia. Most recently the stock traded at $65.01 not far from its 52-week high of $67.22. The company has a very strong balance sheet with hardly any debt in relation to its assets. Mean recommendation is a 2.3 on the 5 scale with analysts putting the median target at $65 and median high target at $74. The company recently raised its guidance for the Q4 2011 which ended Jan. 29. The company expects earnings per share to range from 47 - 49 cents per share, up from previous guidance of 40 - 42 cents based on stronger than anticipated revenues for the quarter. Earnings for Q3 increased 31% to $230.2 million from $175.8 million in the third quarter of fiscal 2010. Comparable stores sales for the first three quarters increased by 18% on a constant dollar basis.

Lululemon seems to be on a roll, but its exceptionally high PE of 57.38 warrants caution. The stock pays no dividend and has a high PEG ratio of 1.81. At current levels, Lululemon looks like no bargain for valuable-minded investors.

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