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.
|
|
Price US$ |
% |
Market cap |
Price US$ |
Q1/07 |
Q2/07 |
Q3/07 |
Q4/07 |
FY1 |
FY2 |
| Company name |
Symbol |
(Oct. 12) |
Yield |
(US$-mil) |
(Oct. 10) {+1} |
% perf. |
% perf. |
% perf. |
% perf. {+2} |
P/E {+3} |
P/E {+3} |
| American Express |
AXP-N |
63.23 |
1.0 |
75,091.3 |
61.89 |
-7.0 |
8.5 |
-3.0 |
4.2 |
17.8 |
15.9 |
| Callaway Golf |
ELY-N |
16.15 |
1.7 |
1,165.4 |
16.32 |
9.4 |
13.0 |
-10.1 |
1.9 |
19.2 |
14.6 |
| Coach Inc. |
COH-N |
43.97 |
0.0 |
16,319.0 |
45.31 |
16.5 |
-5.3 |
-0.3 |
-4.1 |
21.8 |
18.3 |
| Estee Lauder |
EL-N |
43.14 |
1.2 |
8,343.7 |
43.06 |
19.7 |
-6.8 |
-6.7 |
1.4 |
18.3 |
16.4 |
| Marinemax Inc |
HZO-N |
15.85 |
0.0 |
296.4 |
15.76 |
-10.6 |
-13.6 |
-27.3 |
8.2 |
26.3 |
20.2 |
| Nordstrom |
JWN-N |
43.8 |
1.2 |
11,046.4 |
48.61 |
7.3 |
-3.4 |
-8.3 |
3.7 |
16.4 |
14.5 |
| Orient Express Hotels |
OEH-N |
60.13 |
0.2 |
2,548.9 |
59.31 |
26.4 |
-10.7 |
-4.0 |
15.7 |
41.8 |
32.8 |
| Royal Caribbean Cruises |
RCL-N |
41.35 |
1.5 |
8,785.2 |
42.10 |
1.9 |
1.9 |
-9.2 |
7.9 |
15.1 |
12.9 |
| Saks Inc. |
SKS-N |
18.05 |
0.0 |
2,569.6 |
17.65 |
16.9 |
2.4 |
-19.7 |
2.9 |
39.2 |
25.2 |
| Smith & Wollensky |
SWRG-Q |
acquired |
|
|
|
94.3 |
10.6 |
|
|
|
|
| Steiner Leisure |
STNR-Q |
45.24 |
0.0 |
772.2 |
45.97 |
-1.1 |
9.2 |
-11.6 |
5.9 |
17.3 |
14.9 |
| Tempur Pedic Int'l |
TPX-N |
33.86 |
1.0 |
2,810.0 |
33.64 |
27.0 |
-0.3 |
38.0 |
-5.9 |
19.9 |
16.7 |
| Tiffany & Co. |
TIF-N |
54.24 |
1.1 |
7,416.8 |
56.24 |
15.9 |
16.7 |
-1.3 |
7.4 |
24.8 |
21.5 |
| Toll Brothers |
TOL-N |
22.74 |
0.0 |
3,522.0 |
23.12 |
-15.0 |
-8.8 |
-20.0 |
15.7 |
26.9 |
24.3 |
| Wynn Resorts Ltd |
WYNN-Q |
158.18 |
0.0 |
16,129.6 |
155.79 |
1.1 |
-5.5 |
75.8 |
-1.1 |
56.2 |
53.2 |
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
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.
