Wednesday, 27 February 2013

Avoid these luxury retail brands

Commentary: Strategy missteps could cost these retailers

By Margaret Bogenrief
CHICAGO (MarketWatch) — In 2013, many retailers, particularly those in the luxury space, are finding themselves in a difficult position, caught between pricing and profitability.
While higher prices may automatically trigger dreams of high revenues and higher profitability, there are, interestingly, some luxury brands that, lured in by the seemingly promising formula of “lower prices equal more consumers,” now find themselves with less revenue, lower profits, and fewer shoppers.
Here are three luxury brands that, in trying to be all things to all customers, risk losing even more market share in 2013.

Tiffany & Co.

Tiffany’s TIF +0.91%  may, at first sparkle, seem like an odd choice for this list: over the past two years, the luxury retailer’s revenue (and gross margins) have been steadily increasing, jumping from about $2.08 billion in total revenue in 2009 to about $3.64 billion two years later. Even more telling, while trading at 3.3x its tangible book value, the retailer’s shown investors a five-year earnings per share growth rate of more than 11%.
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Luxury retail brands to avoid in 2013

Some luxury retailers find themselves in a difficult position in 2013 after strategy missteps that have left them with less revenue, lower profits, and fewer shoppers.
But by December 2012, Tiffany’s outlook turned blue, and 2013 looks like the jeweler will remain in (relative) neutral. In particular, “sales gains were modest in Tiffany’s key markets, even falling 2% at its Fifth Avenue flagship in November and December,” Reuters reported, and “while Tiffany & Co. Chief Executive Michael Kowalski cited ‘uncertainty’ about the economy in all of its major markets as the reason Tiffany is planning ‘conservatively’ for next year’s sales growth,” there exists a more significant and strategic reason behind Tiffany’s potential 2013 decline.
Back in the mid-2000s, while retailers like Target were climbing through aspirational and innovative designs, brands like Tiffany and Coach (detailed below) decided to move in the opposite direction, down the exclusivity ladder, through heavily-branded products meant to appeal to college girls and aspirational shoppers seeking to sport the Tiffany-branded product without shelling out historic Tiffany-brand prices.
Consequently, in trying to appeal both aesthetically and financially to the growing, pre-crash upper middle-class, Tiffany’s ended up diluting its brand to those traditionally accustomed to the exclusiveness of the little blue box.
Unfortunately, after the financial world fell apart in 2008, housing prices collapsed, suddenly $225 necklaces weren’t on the shopping list of the middle class. This coincided with Tiffany’s “traditional,” higher-end customer fleeing for the likes of Bulgari and its ilk. Without meaning to, Tiffany’s brand has slowly devolved into an upper-middle class brand of aspirational jewelry couture; as long as the global economy stagnates, so will Tiffany’s profitability. A Tiffany spokesman didn’t respond to a request for comment.

Coach Inc.

This brings us to the Coach COH +3.46%  brand. On the one hand, experts question the brand’s seeming lack of design and narrative focus; on the other, Coach’s numbers appear, at first blush, promising: a jump in revenue from $3.06 billion in 2009 to $4.76 billion in 2011, a current PE ratio of 13.4, and a 2.5% dividend. So which story is to be believed in 2013? Read Bloomberg story “Coach Lacking Brand Personality Seen as Hindering Growth.”
Make no mistake: Coach could be a bad buy for the next 12 months.
Once an exclusive purveyor of luxury leather goods, Coach has since become the “must-have” branded bag for club girls, suburban housewives, and college students. Lost amongst gigantic C-logoed gear and neon, seasonal wristlets, Coach has lost its “exclusive” edge, that delicious luxury sheen that once defined the brand. And it shows in the financial details: by Jan. 22 of this year, Coach closed “at a 5.8% discount to the Standard & Poor’s 500 Index on a price-to-earnings basis, the lowest in more than three years.”

Coach
A Coach bag with the “C” logo.
And while Coach reintroduced its Legacy collection this past holiday season in an attempt to buff out the rough spots on its reputation, but the throwback luxury line wasn’t enough, and sales fell. Furthermore, the brand’s recent announcement (in reaction to its shrinking presences in the luxury marketplace) that it’s going to dip its fashionable toe further into women’s apparel market could further devastate the brand’s healthy and competitive (72%) gross margins.
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In short, 2013 will most likely end up being a bad year for Coach. The company didn’t respond to a request for comment.

American Apparel Inc.

Now, is American Apparel APP +1.57%  a “luxury” brand in the traditional sense? No, of course not. But bear with me. A brainchild of Dov Charney, the vertically integrated retailer began as a wholesaler, quickly morphing into the “luxury” t-shirt market in 2003 to capitalize on the middle-class aspirational lifestyle spending binge that defined much of the decade. Following in the footsteps of Calvin Klein and Oscar de la Renta, American Apparel was named the “Company of Year” in 2008 at the 15th Annual Michael Awards for the Fashion Industry.

Dov Charney
Dov Charney, founder of American Apparel.
And then things went wrong.
Matching a drop in spending across the industry, American Apparel’s revenues dropped from $558 million 2009 to $532 million a year later, settling in at $547 million in 2011. Charney’s erratic personal behavior became a liability to the company. And the inherent structural issues underneath the company’s initial profitability creaked under the weight of falling gross margins (on the retail side), overexpansion, and operational inefficiencies. On the brink of bankruptcy in 2009, the retailer narrowly survived, thanks to an $80 million infusion cash from Lion Capital. Now, of course, all seems right: mid-turnaround, company executives announced “preliminary comparable sales increase of 10% for the month of January 31, (2013) on top of 15% increase last year.” Analysts exult. Things are right again.
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Rachel Roy debuts digital runway show

Designer Rachel Roy is opting out of the fashion week circus by producing a short runway film that aims to please both editors and her social media fans.
Not quite. American Apparel still sits in the shadow of Charney’s antics, which continues to drain the company’s reserves with lawsuits and questionable advertising binges (does anyone even CARE anymore that American Apparel is scandalous?) and an unprofitable and continued focus on the lower margin retail side of the business. Despite the fact that American Apparel’s stock price has “skyrocketed” to approximately $1.70 (from a 52-week low of 70 cents), American Apparel is still in trouble. In turn, 2013 poses significant challenges to the brand, with a still-shrinking global market (the euro zone in particular presents severe roadblocks to revenue growth), volatile commodities prices, and no sign of turnaround in retail spending in sight.
Will 2013 mean the end for these three luxury retailers? Of course not. But the year may very well end up highlighting the weaknesses in their once impenetrable facades.
Margaret Bogenrief is a partner with ACM Partners, a boutique financial advisory firm in Chicago, providing due diligence, performance improvement, restructuring and turnaround services. She does not have a position in any of the stocks mentioned in this column.
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