Luxury Shares Fly High On Sunny Outlook for ’04, But Gray Clouds Loom

Luxury firms are enjoying their best times in years, and the fervor is being reflected in share prices flying high, which, experts say, should continue.

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Meanwhile, Wall Street is basking under the sector’s bright light. Luxury retailers, vendors and fashion houses such as Nordstrom Inc., Coach Inc., LVMH, Saks Inc., Neiman Marcus, Tiffany & Co., Bulgari and Burberry Group have seen a significant uptick in their share prices in recent months and, for the near-term, the picture is radiant.

“Our luxury index has outperformed most world markets during the last two years,” Telsey said in her report. “In 2003, out-performance was fueled by 129 percent appreciation at Coach, growth at Tiffany & Co., and 63 percent expansion at both Bulgari and Burberry.”

And here is the sweet part: “If the early performance of equity markets is any indication, the global economy and earnings growth could prove quite strong throughout 2004,” Telsey added.

Indeed, comparing the first day of trading of 2004 to the market close on March 4, most of the stocks in the sector have experienced sharp increases in share prices: Nordstrom is up 20.3 percent; Saks is up 19.4 percent; Coach is up 17.2 percent; Neiman Marcus is up 12.9 percent, and LVMH is up 6.7 percent. Moreover, shares of Coach, Nordstrom, Saks, Neiman Marcus and LVMH have been trading at or near their 52-week highs. And as of Friday’s close, the percent change off of the 50-day moving average for the top luxury stocks showed increases of 3 percent to 15 percent.

Telsey told WWD that investors have been feeling good about luxury companies’ product exclusivities as well as the higher margins garnered by Prada bags and Chloé suits, for example. She also said it was important to take note of the improving travel and tourism industry, improving stock market and the fact that there have been no major wars or SARS outbreaks, all of which are “helping to make consumers feel good about spending this year.”

James Hurley, associate director of equity research at Bear Stearns, explained that the biggest luxury brands such as Gucci and LVMH are draws for investors because they generate a tremendous amount of cash flow. They also have high operating margins, which investors like to see.

Telsey said Coach, for example, is appealing to investors as its same-store sales continue to show solid increases against tough comparisons over last year. The company is also experiencing better-than-expected success in Japan, a newer market for Coach. In addition, she said Coach has extended its products to other categories such as footwear, and consumer acceptance has been strong.
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