Fashion And Luxury Industry Update – Week 5 And 6 – Seeking Alpha

In this article, I am going to give a summary of the most important developments in the fashion and luxury industry in the last 2 weeks. In particular, I am going to focus on some famous names in the segments of luxury, affordable luxury and sportswear.

It’s the first time I’ve published an article regarding the whole fashion industry. Since it’s a sector that I follow closely and a significant portion of my portfolio is invested in fashion and luxury stocks, I wanted to share a few thoughts on what has happened recently and on the industry’s future prospects.

The current earnings season has delivered mixed results.

Let’s start with Coach (NYSE:COH), which reported earnings on January 31. The company is one of the few affordable luxury names that didn’t disappoint during this earnings season. The company is trying to get rid of the “always on sale” label that was damaging the brand reputation and attractiveness. In 2014, the company started a turnaround plan with the aim of closing underperforming store, adjust prices and re-establish top-line and bottom-line growth. We can say that the plan is working quite well, as the company reported the third consecutive quarter of rising comps, something unique in the affordable luxury segment. Revenue, comps, gross profit, operating profit net income and the relative margins are all growing.

Ralph Lauren (NYSE:RL) was not equally “lucky”. The company is in the middle of a turnaround plan started in 2016 (The Way Forward Plan), with the goal of implementing several measures that can restore growth and improve margins. These measures include refocusing on the core brands, closing underperforming stores, improvements in inventory management and cost cuts but, according to management, the positive effects of the restructuring will be evident in Fiscal 2018 and even more in 2019. So far, revenue is still in a downward spiral. In Q3 2017, revenue declined 12% compared to Q3 2016 on a reported basis and was down 11% on a constant currency basis. The decline in revenue is accelerating in comparison to Q1 and Q2, when it fell 4% and 8%, respectively. The decline was mainly due to weakness in the wholesale channel, where the company is reducing shipments in order to “better align with underlying demand and to reduce excess inventory and increase quality of sales as part of the Way Forward plan”. Comparable store sales declined as well, but at a much slower pace (about 4.5%). The stock fell more than 10% after the release, but I think that the market reaction was in large part due to the news that CEO Stefan Larsson will leave the company in May, due to different views with founder and chairman Ralph Lauren.

Michael Kors (NYSE:KORS) is another name that reported poor results. The stock opened 12.5% lower, due to a revenue miss, weakness in both North America and Europe and a disappointing guidance. Besides the slight earnings beat, there was not much to be happy about. Sales fell 3.6%, wholesale net sales declined by 17.8% and comps declined 6.4%. The retail segment was the only segment to grow (+9.2%), helped by the acquisition and consolidation of Michael Kors HK. Nonetheless, as I said in my last article, the market is extremely negative on KORS, and seems to be pricing a strong decline in revenue and earnings, even higher than that experienced by Coach between 2012 and 2015.

Let’s now focus on sport fashion. Under Armour (NYSE:UAA) (NYSE:UA) is the big name this month, since both Nike and Adidas will report in March. The company reported disappointing results for Q4, and the stock crashed by 25% after the news. Revenue grew by 11.7%, while net income and all margins declined. The most scaring news come from North America, where the company’s growth rate has declined from 46% in Q1 2015, to 6% in Q4 2016. It’s clear that the growth story is still compromised, and the company must give signs of strength to justify the current valuation.

Skechers (NYSE:SKX) was the great performer this week. The stock jumped 19% after the earnings release, thanks to a revenue beat and a strong guidance. After seeing the earnings report we understand why the CEO was buying shares with both ends in November. The company reported a 5.5% YoY revenue growth, and expects this rate to accelerate in 2017. The results signal the stock could be regaining the lost momentum.

Although it reported a net loss in Q4 2016, Puma beat earnings and revenue estimates. Revenues in the fourth quarter increased 10%, while EBIT rose 30%. The company expects to maintain the current momentum in 2017 and predicts sharp earnings gains. The stock has gained more than 65% in the past 12 months, while shares of its majority shareholder Kering (OTC:PPRUF) (OTCPK:PPRUY) advanced more than 50%.

Luxury giant Herm̬s reported better than expected revenue growth (+8% at current exchange rates, and +7% at constant exchange rates). All geographies grew between 7% and 9%, confirming a good trend in the luxury segment and a recovery in Asia Рin China in particular. Herm̬s follows other names such as Richemont (OTCPK:CFRHF) (OTCPK:CFRUY), LVMH (OTCPK:LVMHF) (OTCPK:LVMUY), Ferragamo (OTCPK:SFRGF) (OTCPK:SFRGY) and Burberry (OTCPK:BURBY) (OTCPK:BBRYF), which have all reported improving results in the region.

The aforementioned Salvatore Ferragamo released preliminary revenue figures on January 31, reporting revenue growth in all the regions but Europe. As it happened with other peers, the company reported strong results in Asia, in particular in China and Japan. The retail channel in China recorded sales up 6% at constant exchange rates in FY 2016, with a strong acceleration in Q4 2016 (+13% in constant currency vs.+3% in 9M 2016).

Summary and outlook

As we can see, the affordable luxury segment gave mixed signals. On one side, Coach, which is in the middle of a multi-year turnaround plan, posted accelerating growth and was the only American name to give positive signals.

Ralph Lauren and Michael Kors, which have started their turnaround plans more recently, are still exposed to the weakness of the retail sector in the United States. They have been among the most discounted brands in department stores this year, but they are currently working to reduce the number of stores that sell their products, in order to have more control on pricing.

On the sportswear front, Under Armour is still growing but at a much lower pace. It will be important to see how the company can perform both inside and outside North America, since they are both question marks at the moment. On the other side, Puma is moving in the opposite direction, growing faster than expected and showing optimism for the future.

The luxury market is showing signs of recovery and a nice acceleration in some regions and for some players. We can see that the main weaknesses remain in the affordable luxury segment, which is more cyclical and more sensitive to currency fluctuations than the luxury segment.

Regarding geographical performance, we can see that Asia is delivering good growth, which is a very positive sign. Nonetheless, the recovery of luxury sales in China has been limited to domestic consumption, while tourist spending is still suffering, due to a strong dollar (and weak yuan) and stricter visa requirements.

Regarding the future, I remain bullish on the whole fashion and luxury industry. I think the market is offering value in the affordable luxury segment, with stocks like KORS and RL trading at depressed multiples. I believe that the market is extremely focused on YoY comps growth and is not properly taking into account the potential effects of some “political” and “macro” catalysts that could unlock the sector in 2017.

Trump’s promises to cut taxes have already triggered a massive rise in business and consumer confidence, which could help the sector recovery. On the other side, there is a lot of negativity priced in these stocks, related to the potential damages of an import tariff. Positive news on that front may trigger a recovery anytime, and if we focused only on comps we could miss a large portion of the uptrend that could result.

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Disclosure: I am/we are long KORS, RL, SKX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.


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