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Forecasting the Luxury Goods Industry

Wednesday - 7/10/2013, 3:21am  ET

The luxury goods sector is growing fast, hand-in-hand with the growth of wealth in the developing world. Countries such as Russia,China and Brazil are creating thousands of new rich families every year. One of the many direct results of this trend -- which could last many decades -- has been the tremendous growth of high-end-luxury companies. Here I will try to forecast next quarter's results for my top three luxury goods companies.

British chic-style

Burberry (NASDAQOTH: BURBY) has been an incredibly successful story so far. The company has been able to reshape itself and become a symbol of British chic-elegance. The numbers speak for themselves. Last quarter's organic growth was 10% year-over-year with retail same-store-sales -- the most relevant performance figure for the industry -- up by 8%.

For the coming quarter, I expect organic growth to come as high as 5% year-over-year and retail same-store-sales to come up by 6%. The reason to expect overall growth coming at just 5% is that I expect a decline in wholesale. Regardless, the company remains extremely healthy.

Most importantly, there is huge room for margin improvement. While a company like Gucci has operating margins of 31%, Burberry has operating margins of 17%. The reason is that Burberry's operating expenses have remained high due to the upcoming changes regarding its beauty division and its business in Japan.

Trading at 2013 20 times P/E and paying a 2.95% cash dividend yield, I love this British chic-style company.

The world-wide king of luxury

LVMH Moet Hennessy Louis Vuitton (NASDAQOTH: LVMUY), the always expanding multi-brand wine and spirits to bags and clothing holding, is my favorite large capitalization luxury goods company. The company's last quarter was a very healthy one. The group's organic growth was 10% year-over-year with fashion and leather (35% of sales and 53% of the company's profits) growing by 5%. Other parts of the group showed faster growth: Sephora, Bulgari jewelry, Dior perfumes and Hennessy are growing seriously fast.

I expect this luxury giant to show good first half 2013 results. I would expect 8% year-over-year organic growth (4% year-over-year for fashion and leather) and a broadly stable 21% operating margin. 

Even when LVMH's market price ultimately depends on Louis Vuitton's top-line momentum in Asia (where the brand is not opening additional stores in order to protect the brand's exclusivity), I think the company is always a great asset to own. LVMH trades at 2013 17 times P/E and pays a 2% cash dividend yield.

An American classic

Tiffany & Co  is one of the most attractive longer-term opportunities in the luxury space. In the recent quarters, Tiffany has suffered meaningful headwinds from rising commodity costs but its outlook is improving. Recent signs of improving jewelry demand along with easing commodity costs will help Tiffany's earnings come back to high growth.

Last quarter's same-store-sales are evidence of the coming improvement. The company was able to show investors 8% year-over-year growth (versus a consensus figure for a 1.6% gain). Same-store-sales came especially high in Japan (21% year-over-year) and Asia-Pacific (9% year-over-year). Meanwhile, the Europe and Americas regions (12% and 49% of total revenues) showed same-store-sales increases of 6% year-over-year and 3% year-over-year, respectively.
For the next quarter, I expect the company to show 9% year-over-year same-store-sales growth and overall top-line growth of 8%. Meanwhile, in the long term, I would expect the company to grow overall sales by 9.5% year-over-year (5% from new store openings and 4.5% from same-store-sales growth). All this should happen as operating margins grow to over 20% from the current 18.5%, as the company shifts its sales to higher margin regions and as commodity costs pressures recede.
Trading at 2013 22.6 times P/E and paying a 1.85% cash dividend yield, I think Tiffany is one of the greatest assets within the luxury goods space.

Foolish conclusion

The three companies named above all operate within a sector that is growing organically at a 9% year-over-year rate. With US consumers recovering from the crisis and the Asian markets still growing, I think you should follow all these companies closely, expecting growth and margin expansion.

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