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Going Upscale: We're In With The In Crowd

 May 14, 2012 09:58 AM

(By Kevin Donovan) We see by our elegant $9.76 Casio watch recently purchased from Amazon that it's time to check in on the one-percenters, those at the top of the income food chain who purportedly are getting all the wealth this lame economy can create.  More specifically, will the swells buy enough of the stuff we nouveau riche wannabes crave to buoy purveyors of luxury goods?

Since Fossil Inc. (FOSL) rattled the upscale retail sector last week with its alarm over the outlook in Europe, stocks in the space have been hurt from the fallout.  But we don't see knives falling from the sky and think it may be time to pick up bargains.

[Related -Coach, Inc. (COH) Q2 Earnings Preview: Could Leave You Holding The Bag]

Shares of Fossil plunged 40% after it reported disappointing first quarter sales and painted a bleaker picture for sales going forward, particularly in Europe, where sclerosis has reached the point at which siestas in Spain and vacations on the Riviera are endangered Old World traditions.

But we think the rich – and, more importantly, the aspirational rich – will always be with us. 

Here are three stocks in the space we would buy in order of preference.

Tiffany (TIF), at about $63, is down 14.9% in the last six months.  This Fifth Avenue icon of the carriage trade sports a trailing-12-months' PE of 18.49, a price to sales ratio of 2.20 and an operating margin of 20.62, compared with the specialty retailers' universe of 15.13, 1.20 and 10.05, respectively.

[Related -Jobs Growth Tepid At Best]

Though Tiffany missed first quarter earnings estimates, the top line grew 8%. The company is committed to expanding on its current 247-store base and continues to return cash to shareholders via stock buybacks and a $0.29 quarterly dividend yielding 1.84%.  Geographically diversified, Tiffany should be able to ride out any European storms.  We think store expansion and the cachet of the Tiffany brand merits a PE of at least 25, its trailing-12-months' high.

Coach Inc. (COH) is down 7.8% in the last six months and trades at a TTM PE of 20.43, price to sales of 4.25 with an operating margin of 32.17%. This compares to the textile, apparel and luxury goods sector averages of 16.51, 2.62 and 15.86%, respectively.

In the latest quarter, this seller of handbags, belts and other neat stuff reported sales up 16.6% over the year-ago quarter and ahead of estimates. EPS also beat estimates and was up 24% from the prior year quarter.  The company expects double-digit earnings growth to continue, which we think warrants a PE exceeding its TTM high of 24.

No trip around the luxury sector would be complete without tasting, wearing and, well, luxuriating in the products marketed by LVMH Moett Hennessy Louis Vuitton (LVMUY), down 1.1% in the last six months in the over-the-counter U.S. market.  LVMH sports a TTM PE of 19.70, price to sales of 2.57 and an operating margin of 22.5%.

With a product line that includes TAG Heurer, Dom Perignon and Hennessy, LVMH operates more than 3,000 stores worldwide and depended on Asian and U.S. customers to boost sales 14% in the first quarter compared with last year.  That customer mix should inoculate the French company against any sag from Europe's illnesses.




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