Is the worst over for luxury stocks?

Most seem poised for troubled second-quarter numbers. But there's one that's hanging in there.

By InvestorPlace May 30, 2012 10:36AM

By James Brumley

 

The good part about owning luxury stocks: They fly high when investors are feeling giddy. The bad part about owning luxury stocks: Investors will dump them with extreme prejudice at just the slightest whiff of economic trouble.

 

Well, investors got a whiff of trouble in late March, sending shares of Michael Kors Holdings (KORS), Tiffany & Co. (TIF), Blue Nile (NILE), Ralph Lauren (RL) and a few other high-end-goods manufacturers into the proverbial gutter. It's a complete turnaround from the rally these names were doling out just a few months earlier.

 

Of course, what's done is done. The questions now are (1) what happened and (2) is the worst over?

 

What happened?

Take Tiffany & Co. To give credit where it's due, the jeweler beat top-line estimates last quarter with revenue of $819.2 million (up 7.6%); the pros were only looking for $816.5 million. Where the company crapped out was on the bottom line. Though per-share profits were up from 63 cents in the year-ago quarter to 64 cents this time around, analysts had been expecting 69 cents.

 

Now, although it was more than a slight shortfall, the numbers themselves weren't horrifying. In the hands of good spin doctors of a seasoned investor relations department the company might have been able to weasel out of those tepid results unscathed.


When the salt of cutting back on its forecast was poured on the wound, though, it was more than investors could handle. Tiffany dialed back its full-year profit outlook from $3.95-$4.05 per share to $3.70-$3.80, wholly under the average analyst estimate of $3.98 per share. The market punished the stock to the tune of 8%.

 

Were it just Tiffany & Co., the whole thing might be chalked up to a stroke of back luck. But it wasn't.

 

Michael Kors shares followed Fossil (FOSL) lower after Fossil reeled in its 2012 outlook. Signet Jewelers (SIG) was hand-in-hand with Tiffany earlier in the week when it walked into the lowered-guidance trap. SIG fell from $47.75 to $44.01 on Thursday when the jewelry industry noted that jewelry sales growth had fallen from 10.2% year-over-year in the third quarter to only 5.3% in the first quarter. Signet's lowered guidance didn't help either.

 

That's more problems than can be chalked up to mere bad luck.

 

Yes, Ralph Lauren managed to top its sales and per-share earnings estimates by posting numbers of $1.62 billion (up 14%) and 99 cents (up 34%), respectively. The reported numbers might even have offered a glimmer of hope for luxury apparel, even if high-end jewelry or luxury decorative items were seeing a sales slowdown.


Yet with Ralph Lauren also suggesting its wholesale business would be crimped thanks to Europe's woes, this year's overall sales growth forecast for the company was whittled down to single-digit levels -- hardly the kind of thing that keeps investors excited.

 

As it turns out, all the folks who were selling luxury-oriented stocks near the end of March made the right call.

 

Is the worst over?

In their defense, traders who rode these stocks lower since late March can at least claim they didn't know what was in store -- and the market's bearish tide didn't help either. The cat's out of the bag now, though, so what's next for these stocks? Or more directly, is the worst already baked in, and are these stocks now bargains?

 

Baked in? Yes. Bargains? No. A low-priced stock is only a bargain if there's a reasonable chance it could do something to move higher at some point in the foreseeable future. For the bulk of these names, the kind of slowdown we've already seen tends to last awhile and can even become self-fueling (i.e. the worse the spending gets, the less consumers want to spend). With that as the backdrop, it's unlikely we'll see many pleasant surprises form the group anytime soon, with one possible exception: Blue Nile.

 

Although Blue Nile offers high-end luxury jewelry, its whole shtick is better prices for the same jewelry that consumers might overpay for at a traditional jewelry store. By cutting out the middleman and selling direct to consumers via the website, Blue Nile has been carving out a decent piece of the luxury pie. Though shares still are priced at a frothy 43.9 times forward-looking earnings, sales have been reliable and profits have, well, at least consistently existed.

 

NILE still is a conceptual investment rather than a performance-based one, but it's the only major investment choice within the luxury goods world that looks worth a damn as we head into the slow summer months. Most everyone else seems poised to post troubled second-quarter numbers -- at a point when investors already are going to be discouraged.

 

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

 

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