Retail royalty

Prada SpA
Founded: 1913

For most of its history, Prada was known as a maker of high-end luggage and handbags. But in the 1980s it branched out into shoes, ready-to-wear clothes, fragrances and accessories. The company now operates its own worldwide chain of retail stores and even its own ski schools.

Roberto Cavalli SpA
Headquarters: Florence, Italy
Founded: early 1960s

This fashion house produces both high-fashion runway designs and ready-to-wear clothes, as well as lingerie and beach wear, eyewear, bags, shoes, watches and accessories. It also operates high-end boutiques in prime jetsetter locations around the world.

Salvatore Ferragamo Italia
Headquarters: Florence, Italy
Founded: 1925

Best known for its shoes, Salvatore Ferragamo also makes bags, ready-to-wear fashion, eyewear, accessories and perfume, and operates a chain of retail stores. -  2007 October 10   GLOBE & MAIL

Living large: from big houses to flashing trinkets

WHAT ARE WE LOOKING FOR?

Consumer discretionary stocks are hardly the darling of the Street at the moment, what with the United States flirting with a consumer-led recession. The deepening housing slump is making the average American homeowner poorer, at least on paper, by the day.

Still, a growing number of equity strategists are touting a subsegment of the consumer discretionary sector - luxury stocks - as a wind-resistant pocket capable of weathering the economic storms that might buffet the group.

WHY IS LUXURY LESS CYCLICAL?

First, it's a rapidly growing market: Worldwide sales of luxury goods are about $150-billion annually, and are expected to grow by about 7 per cent a year over the next five years, as the rich continue to get richer. The number of millionaires in the world has doubled in 10 years.

Second, while the rest of us might tighten our belts in times of economic uncertainty, the rich are far less bothered: Citigroup equity strategist Tobias Levkovich notes that while discount retailers such as Wal-Mart are feeling the pinch from hesitant consumers, sales figures at high-end retailers such as Tiffany & Co. are doing just fine. And since the top 20 per cent of income earners among U.S. consumers account for almost 40 per cent of all consumer spending - and spend more than the bottom 60 per cent of earners combined - why not focus your investment attention on the producers catering to their deep pockets?

THE LIVING LARGE INDEX

With that in mind, Citigroup has been tracking an equal-weighted basket of 15 U.S. stocks representing the cream of U.S. luxury goods companies.Members of the Living Large Index cover luxury purchases from big houses and boats (Toll Brothers, MarineMax) to clothing and accessories (Nordstrom, Saks) to flashy trinkets (Tiffany, Coach) to resorts and leisure (Royal Caribbean, Wynn Resorts) - it even includes the credit card to pay for it all (American Express). Citigroup publishes performance numbers for the Living Large Index on a quarterly basis, and recently put out the third-quarter numbers.

The Living Large Index was up 11.7 per cent in the first nine months of the year, topping the S&P 500 (up 7.7 per cent) and far outstripping the broad S&P consumer discretionary subindex (down 4.3 per cent). But in the third quarter, the group slipped 1.7 per cent - still better than its consumer discretionary peers (down 6.5 per cent) but lagging the overall S&P 500 (up 1.6 per cent). The performance suggests that while the luxury group may outperform its peers, it is still at risk when investors are rotating out of more volatile, cyclical sectors and into defensive plays, as they were over the summer.

For the third quarter, Wynn Resorts was the big winner, surging 76 per cent amid a bullish growth outlook for its glitzy new casino in Macao, the rapidly growing gambling mecca off China's southern coast. But the stock has lost momentum since the end of the quarter as September numbers out of Macao came short of expectations. Note that Wynn is also the most expensive stock in the group on a price-to-earnings basis.

SOURCE: GLOBE INVESTOR, FACTSET AND CITI INVESTMENT RESEARCH {+1} Oct. 10 = time of Cititgroup report; {+2} Performance through Oct.10; {+3} Through 10/10/07, Price to IBES Mean EPS Estimate for this fiscal year and next fiscal year

 - 2007 October 16   GLOBE & MAIL

Luxury Goods Firm Eye Going Public

A who's who of haute couture houses are lining up for possible initial public offerings in the next few months, looking to cash in at the peak of the cycle for the luxury goods market.

In the past month, Italian high-fashion legends Prada SpA and Roberto Cavalli SpA have both reportedly floated the idea of IPOs to the financial community, while shoe making giant Salvatore Ferragamo Italia SpA is also considering going public next year.  Other big names, including Giorgio Armani, Versace and Dolce & Gabbana, are also being touted as possible IPO or takeover candidates in the next year, according to analysts who track the industry.

"We are at the very peak of the luxury goods cycle. That's when everyone looks to take their stocks to the public," said analyst Allesandra Coppola of Standard & Poor's in London.

She believes the prospects for a slowing of the global economy, coupled with the strengthening of the euro against the U.S. dollar and Japanese yen, will put the brakes on expansion for luxury goods makers, particularly those based in Europe. As a result, she suggested any new IPOs would hit the market at a time when their peers are in a sideways drift.

"We're not going to see much of an expansion of profits," she said.

Luxury goods stocks have grown in popularity among investors over the past couple of years, amid double-digit sales and profit growth. The strong global economy and surging wealth in many parts of the world, particularly emerging giants such as China and India, have spurred demand for high-end goods and allowed their makers to expand their profit margins. The number of millionaires in the world has doubled in the past 10 years, to 9.5 million at the end of last year, according to the World Wealth Report, published annually by Merrill Lynch and Capgemini.

That growth, combined with the superior pricing power luxury-goods makers have exhibited - Forbes Magazine reports that its Cost of Living Extremely Well Index rose almost three times as fast as the U.S. consumer price index last year, and twice as fast over the past 30 years - has produced out-performance in the luxury subsegment of the consumer products sector, and that has drawn increased focus from the investment community. Merrill Lynch and BNP Paribas both introduced global luxury indexes early in the year, while Claymore Securities Inc. launched an exchange-traded fund, the Claymore/Robb Report Global Luxury ETF, at the end of July.

The luxury goods sector is believed to be less susceptible to the economic cycle than the bulk of consumer-discretionary stocks - a particularly timely concern given the U.S. real estate downturn and its potential threat to consumer spending. "Upper-income Americans tend to be far less buffeted by home price weakness or higher energy prices," wrote Citigroup Global Markets Inc. strategist Tobias Levkovich in a report this week.

Citigroup's own Living Large index, which tracks 15 high-end stocks, was up almost 12 per cent in the first nine months of the year, well ahead of the S&P 500 consumer-discretionary sector (down 4 per cent) and the overall S&P 500 index (up 8 per cent). But in the third quarter, the Living Large group slipped 1.7 per cent. That still outperformed the 6.5-per-cent decline for the consumer-discretionary group as a whole, but it trailed the 1.6-per-cent rise in the S&P 500, as nervousness over the risk of a consumer slowdown sent investors away from all consumer-discretionary stocks.

The sluggish quarter suggests the clock may be ticking for any luxury companies who want to tap into the public markets.

Prada has been down that road before, having planned an IPO in 2001 before deciding to withdraw it after the Sept. 11 terrorist attacks, and since then the company has twice shelved plans for share offerings. Analysts believe Prada doesn't want to see another opportunity slip away, and could launch a $2-billion-plus IPO by early next year.

Roberto Cavalli could also launch a $1.2-billion IPO in the next few months, industry sources have said, though the company has remained cagey about its plans. Meanwhile, Salvatore Ferragamo has said it will take its shares to market in the first half of 2008.

While many economists argue that economic growth in emerging markets could make up for a slowdown in the U.S. and other developed economies over the next year or so, those developing economies still have relatively small high-wealth populations.

Instead, luxury goods makers still rely heavily on their two biggest consumer markets, the United States and Japan - both of which pose a currency threat.

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