A Wet Blanket on Luxury

 | Aug 28, 2012 | 7:00 AM EDT
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With an uncertain global environment and worries over the Chinese economy, Sotheby's (BID), Tiffany (TIF) and Coach (COH) shares have been beaten down. Is now a better time to get into these stocks?

The Chinese stock market is the worst-performing market in the world. Europe is a basketcase, and the U.S. economy is in slow motion. But rich people aren't going away. Yes, spending has receded on luxury items, like jewelry and art. But it's not comparable to 2009, when spending fell off a cliff, right? After all, Sotheby's just auctioned off a car for $11 million, the most ever paid for a car. Surely things can't be all that bad.

Well, let's first look at Sotheby's, which reported second-quarter earnings of $1.24 per share -- $0.25 less than the consensus estimate of $1.49 -- on revenue of just $303.9 million. Sales grew 17.8%, also below the consensus estimate. Moreover, those results include the sale of Edvard Munch's The Scream, which sold for a record $119.9 million, the highest price paid for any work of art. Despite the earnings miss, Sotheby's has always been an underperformer. To me, it's not worth the time to follow it.

Turning to Tiffany, the other day it reported a lousy quarter, but the numbers were less bad than expected. The shorts were squeezed out as investors jammed the stock up 7%. The company said same-store sales fell 1% globally and were up 2% in Europe, while analysts were looking for drops of 3% and 5%, respectively.  More worrisome, though, was that the company saw a 9% decline in same-store sales at its flagship store in New York.

To top it off, Tiffany cut guidance from about $4 per share to $3.75. Management now expects sales to grow 6.5%, down from its previous estimate of 7.5%. High gold and silver prices have really put pressure on margins, but recently these costs have moderated. Management also said it expects to open 28 new stores, up from the previously announced 24. Despite all the "good" news, I find it hard to like Tiffany. I'm sure the stock is good for a short-term trade but, in my experience, buying less-bad companies almost always leads to underperformance.

Coach, on the other hand, was knocked down in April after fears of economic headwinds. The company reported earnings of $0.77 per share, $0.02 better than expected. Revenue rose 17% year over year and gross margin increased 100 basis points to 73.8%. In addition, Coach raised its cash dividend and repurchased 2.33 million shares.

If I were searching for a luxury name, I'd clearly consider Coach the best of the bunch. The stock has been battered, but the company is still functioning at a high level. Sotheby's has always been unpredictable, and Tiffany is dealing with factors -- such as high gold and silver prices -- that are out of its control. In my opinion, one name in the group is investable. Life in the lap of luxury isn't all that it's cracked up to be.



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