Sunday, June 29, 2014

My Overview of the Luxury Market Movements and Investment Opportunities

Ralph Lauren Logo
The Luxury market has evolved over the recent years. And, for a while it was not much of an appealing investment.
This was due to several factors. The definition of ‘luxury’ is the antithesis of necessity. 
During the financial crisis era luxury was  not necessary. Consumer spending dipped these past years. However, companies within the luxury retail industry have had to acclimate to economic conditions.
U.S. global recession is slowly dissipating and consumer sentiment has percolated.  The recent years have left prints on the luxury retail market while experiencing an overall positive growth with shifts in the following: customer base, luxury image, and international presence.   This means high growth potential for participants within the luxury retail industry.
Diverse Luxury Consumer
One factor includes the increase in customer base which is bringing additional cash flow to these companies. Historically, a more homogenous base of affluent customers were primary consumer targets for luxury companies. Now that has shifted to a more diversified-income customer base. This is especially observed in the United States. Companies are creating labels that target the more average-income consumer; for example Ralph Lauren’s Polo Brand Groups and Michael Kors’ Kors line. 
Global Luxury
Another source of growth comes overseas. (According to Boston Consulting Group) Over 2013, global luxury spending grew by 2%. Over 2012-2016, the global luxury goods market is expected to grow CAGR (compound annual growth rate) of 7.9%. Today, the U.S. luxury market composes 35% of the global luxury market whereas in 2005 America represented 20%. Internationally, there is a burgeoning potential; especially in Europe and China. There has been a 2% and 4% growth in European and Chinese luxury markets, respectively. (According to Bain & Company,) Europe’s residents and tourists buy 34% of the world’s luxury goods. Even now, Europe serves as a capitol within the realm of high-end fashion brands. However, fashion potential has also sprouted in China: $1 of every $4 is spent on global luxury goods. Another emerging market within the luxury sphere is Africa: 11% growth for luxury. 
Luxury Image
The idea of fashion-technology marriage has further speculating a new booming industry. This has  potential for revenue growth for luxury retail as it moves toward a ‘necessity’. One prominent shift includes a dimmed desire to brandish signature emblems of a brand and interest in fashion-tech products. Luxury carries value from authenticity, exclusive motif, and utility rather than exhibitionism. (According to Bain & Company) Thirty-five percent of the luxury consumers put quality first before the logo. Now, subtle intricacies of a designer and the depth of a label yield the luxury-induced prestige. Due to this, companies are moving towards sans-logo products which includes Prêt-à-Porter products combined with technology. These companies will strengthen their luxury labels as they focus on connecting  a luxury experience directly with consumers.
Two iconic luxury retail American companies, have been making interesting strides: Ralph Lauren (RL), and Michael Kors (KORS).
Ralph Lauren
Ralph Lauren, known as an iconic American company for authentic western fashion, made Team USA’s Olympic uniforms.  This was a grand strategy towards global exposure at one of the largest international events. The company carries strong brand power. Ralph Lauren’s portfolio of brands include Black Label, Purple label, Lauren by Ralph Lauren, Ralph Lauren Collection, Chaps, Club Monaco, and more. These are some of the most recognized in the world.
Additionally, Ralph Lauren is opening more stores and expanding e-commerce to further reach out to the consumer. In New York City, Ralph Lauren will open a Polo flagship store on Fifth Avenue in September 2014.  The company is increasing it’s presence internationally.  Ralph Lauren will open a 20,000 square feet flagship store in Hong Kong. 
Previous CEO of Yves Saint Lauren, Reed Kratoff, director of LVMH Moët Hennessy Louis Vuitton, and with experience at Christian Dior, Valérie Hermann is joining as President of Ralph Lauren Luxury Collections (RRL, Black Label, Purple Label, fine Jewelry, etc.). Not only is this to expand Ralph Lauren’s luxury business (higher-end labels) but also to strengthen merchandise innovation in accessories. Ralph Lauren’s current market cap values at $14B. 
Michael Kors
Michael Kors, known for fashion with jet-set aesthetic and modern elegance, has been making waves. As it made its market debut two years ago, Kors’ entrance has posed quite a competition. This is especially for brands such as Coach which has suffered low sales recently. Kors is also penetrating the international market, turning out to be a strong rival among the European fashion houses. The company challenged European luxury by opening stores near the competition; such as in Paris, France. Given context of the Euro-zone crisis Kors’ mix of luxury, affordability, and hint of American style is appealing to Europeans. Europe sales have more than doubled. And recently, Kors opened a 5,800 square feet flagship in China. Michael Kors current valued at $18B and will reported earnings May 26th.
 Future Luxury IPOs and Competition
Luxury market faces burgeoning competition. Other market participants may follow suit with an IPO; such as, Tory Burch and J. Crew Group, Inc. group. Both are speculated to enter the equity market this year. Tory Burch has been subtly increasing its image and J. Crew has opened stores in Hong Kong and London.
With a new CEO, Craig Leavitt, and new  narrowed focus to one label only, Kate Spade (KATE) can embrace potential for further positive growth. The company recently changed their name from former name, Fifth & Pacific Companies after selling off Lucky Brand Jeans.
Michael Kors on the rise

Michael Kors' last quarter was remarkable as it grew sales by 59% and income by an even greater margin of 77%. Kors earned $230 million on a little over $1 billion in revenue. Furthermore, Kors only has 9% of the luxury handbag market. The company has an excellent opportunity to eat away at Coach's larger share of 22%.

In comparison with Kate Spade, Kors is in a better position financially as it carries no debt and has a cash account of over $800 million. Conversely, Kate Spade has a little less than $400 million in debt and just shy of $100 million in cash. On a valuation basis, Kors trades at almost half of the P/E multiple of Kate Spade, 32 versus 57.

Also, Michael Kors is expanding into new products and markets in a recent deal with Luxottica Group. The two companies are introducing a Michael Kors eye-wear collection that will debut in early 2015. Michael Kors is also working to capture more share of the growing men's luxury business in addition to its bread-and-butter business of women's luxury fashion.

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