When it comes to your personal shopping, do you choose value brands or luxury items?
With little to differentiate brands when it comes to food and other basics, better brands for clothing, jewelry, and accessories are finding a niche by offering experiences that cannot be commoditized.
For example, retailers offer shopping environments and perks that you just cannot get at Amazon or a discount store – and that can make them better choices for investors too.
Pros and Cons of Investing in Luxury Lifestyle Brands
Luxury brands are less concerned with competing on cost so investors do not have to worry as much about the effects of cost-cutting measures that erode the margins of commodity-type retailers.
In 2017, the market for luxury lifestyle goods was quantified at $307 billion. CNBC reports that the market could reach $446 billion by 2025.
However, luxury lifestyle brands have their own challenges. For one, they have to remain desirable enough that shoppers are willing to pay more for those goods.
Luxury brands come at a premium and customers have to be willing to pay extra for the brand. To accomplish this, quality must remain very high, both of materials and the buying experience.
The brand also has to be considered fashionable enough to warrant a premium price over other high-quality retailers.
In recent years a trend has emerged for luxury brands to partner with department stores to improve distribution, but many brands are scaling back in that regard because they found that it eroded the prestige of their labels.
Finally, luxury brands need to attract new shoppers in order to grow, appealing to younger generations or gaining market share from other brands. It is a tall order and one that not every company is able to meet.
Is Tapestry Stock Worth Buying?
In 2017, Tapestry added accessory-label Kate Spade to its collection of brands. The company decided to purchase the label in a bid to appeal to younger buyers and allow it to compete more effectively with rivals like Michael Kors (NYSE: KORS) which has been historically popular with millennial customers.
Tapestry beat its 4Q18 estimates and topped full-year revenue estimates, but its $2.4 billion-gamble on Kate Spade has not paid off as well as investors may have hoped.
The label has not been contributing to Tapestry’s total sales as much as expected. Global Kate Spade comps came in down 9% – worse than analysts’ estimates of a 7% decline.
At the same time, Coach sales were twice as good as analysts predicted, coming in at a 6% increase year-over-year versus estimates of 3%. The Stuart Weitzman label rose by 5%.
Tapestry (NYSE: TPR) explained the differences, saying that they were hurt by production delays but bolstered by growth at Coach, cost control measures, and the relaunch of Signature.
Going forward, Tapestry (NYSE: TPR) expects these trends to continue. Coach may see some boost from a new collaboration with Selena Gomez, which should help the legacy brand appeal to younger consumers.
For 1Q19, Tapestry again beat analyst estimates but it is still priced low relative to future earnings. At $38.93 per share, its forward PE is just 2.56.
Consensus estimates are that Tapestry will grow 6.1% this year and 11.1% next year.
Over the next five years, analysts predict the company to grow at a rate of 9.82% per annum on average. The company also pays an attractive 3.32% dividend yield which may be enough to offset some uncertainty about its future earnings potential for some investors.
Should You Invest in Michael Kors Stock?
The company has stand-alone stores, but it also licenses some of its products for department stores.
Michael Kors (NYSE: KORS) recently signed a $2.1 billion deal to buy the designer brand Versace. Once the deal closes, Michael Kors will become Capri Holdings, but it will retain the Michael Kors name as a label.
This purchase increases the number of stores the company owns to 300 from 200 and pulls the company to more of a shoes and accessories brand than a clothing brand.
Once the deal closes, 60% of its revenue will come from shoes and accessories, compared to just 35% now. It also provides an entrance point to Asian and European markets while helping the company reduce its percentage of revenue from the Americas, helping the company better hedge its interests.
Right now, Michael Kors (NYSE: KORS) does not pay a dividend. Analysts forecast the company to grow at 11.1% over the next year and 6.3% per annum over the next five years.
As recently as September 2018, shares in this company were over $70 per share. The decline came after a market-wide selloff.
At its current price, Michael Kors has a forward PE of 8.3. The jury is out on whether it was a massive market correction or the stock has been unfairly devalued.
Kate Spade vs Michael Kors Stock: Which is Best?
There are reasons to be encouraged for both companies. Kate Spade has had strong performance recently, but Michael Kors may be significantly undervalued. Its purchase of Versace could be a game changer if it runs the label well.