NEW YORK – Luxury and retail titans certainly had plenty to celebrate in 2005 thanks to their booming shares.
Top public firms in the luxury and specialty sectors generally saw their shares far outperform other companies in terms of growth last year. And if the current economic underpinnings hold course on a global level, 2006 may shape up to be another good year – especially for luxe firms such as LVMH Moët Hennessy Louis Vuitton, Richemont, Tiffany & Co., Tod’s SpA, Coach Inc., Hermès International and Polo Ralph Lauren Corp., according to a Bear Stearns equity report.
In the meantime, the top executives and designers with options and holdings at these and other companies, including Ralph Lauren, Bernard Arnault, Lew Frankfort and Reed Krakoff, among others, were made richer by investors who lined up behind their stocks to drive valuations higher.
In an analysis by WWD of the top public fashion suppliers and retailers, 27 of the 38 firms analyzed for this report saw their share prices significantly outpace the S&P 500, which gained 3 percent for the year.
The 38 firms saw their shares rise 19.7 percent on average. The top gainers include: Chico’s, with a 96.4 percent year-end increase in stock value; Tod’s, with a 69.3 percent gain; and Nordstrom, with a 62.8 percent gain. Eighteen of the companies tracked had gains of more than 20 percent. They included companies such as Coach (up 21 percent), Hermès (plus 45 percent), Polo Ralph Lauren (up 34.8 percent), Tommy Hilfiger Corp. (up 49 percent on its pending acquisition), J.C. Penney Co. Inc. (up 35.7 percent), New York & Company Inc. (up 23.8 percent), Revlon Inc. (plus 30.8 percent), Bon-Ton Stores (up 25.8 percent), and Saks Inc. (a 17.2 percent increase).
Other notable gainers include Urban Outfitters Inc. and Sears Holdings Corp., which rose 15.5 and 15.4 percent, respectively.
Setting these companies apart from their peers and in favor with Wall Street in 2005 was not only their ability to drive top- and bottom- line growth through acquisitions, merchandising initiatives or product launches, or even their ability to ride the luxury wave. What set those companies apart was their ability to innovate.
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Of course, there were several executives and major shareholders who decided the time was right to sell or merge. Tommy Hilfiger, Neiman Marcus, Federated Department Stores, Bon-Ton and Saks all saw their shares soar on acquisition plays. Much of the dealmaking involved the private equity market, which has been flush with over $100 billion in cash to invest. The private equity firms’ hunger to invest often resulted in high premiums. Neiman Marcus, for example, garnered a 35 percent premium over its share price.
The stock winners of 2005 are forward-thinking merchandisers and designers who are able to efficiently source goods in a way that consistently bolsters their margins. They include fast-fashion retailers such as Hennes & Mauritz, and high-end department store retailers such as Nordstrom, which manages to attract aspirational consumers as well as the truly wealthy.
Some of the 2005’s winners include:
- Scott Edmonds, the 47-year-old chief executive officer, president and director of Chico’s. Edmonds is a major, direct owner of the company, and was able to increase the value of his holdings by over 96 percent by maintaining the retailer’s focus on its core customer: the aging Baby Boomer.
- François-Henri Pinault, PPR chairman and ceo, who bolstered his holdings and those of the luxury firm’s major shareholders by 32 percent as a result of continued growth of its key Gucci brand in the post-Tom Ford era and the resurgence of some of its smaller labels, including Yves Saint Laurent and Balenciaga.
- Ralph Lauren, chairman and ceo of Polo Ralph Lauren. The value of Lauren’s personal holdings (not including options) rose about $500 million from the beginning of the year to the last day of trading, by WWD estimates. Shares swelled nearly 35 percent on successful spring and fall launches, a continued focus on opening its own stores as well as strong international growth.
- Groupe Arnault and Bernard Arnault, LVMH Moët Hennessy Louis Vuitton’s chairman and ceo. Groupe Arnault’s stake in LVMH is about 48 percent. LVMH shares rose over 34 percent during the year as its core Louis Vuitton brand opened major flagships on the Champs Elysées, in Beijing and in Tokyo; and as Dior’s sales rose sharply, and Fendi continued its drive toward becoming a $1 billion brand. Results were also bolstered by the firm’s dominance in the $4.5 billion champagne sector. Industry sales are expected to finish 2005 with a 1.5 percent gain, which is over a 4 percent gain of 2004’s record high.
- Michael Jeffries, chairman and ceo of Abercrombie & Fitch, who made investors and himself wealthier by rolling out new concepts such as Ruehl, as well as pleasing the often hard-to-satisfy teen shopper. The stock’s value rose 42.2 percent, which pushed Jeffries holdings (excluding options) to about $91 million from $65 million.
- R. Brad Martin, ceo and chairman of Saks Inc. and its institutional shareholders. The value of Martin’s 3.2 million shares climbed to about $54 million from $46 million following the divesture of the retailer’s department stores, which also happened to grow the share value of one of the acquirers, Bon-Ton Stores, by nearly 26 percent. Shares were also buoyed by market speculation throughout the year over whether Saks Inc. would follow Neiman’s and attempt to sell its Saks Fifth Avenue unit, which remains in turnaround mode.
- Terry Lundgren, chairman and ceo of Federated Department Stores, who delivered a 16.2 percent stock value gain to shareholders for engineering the $17 billion merger between Federated and May Department Stores. More than 88 percent of Federated ownership is institutional, and include FMR Corp. (better known as Fidelity Management and Research) and Private Capital Management Co. LLP.
- The Nordstroms, whose members are top executives at the retailer and include Blake, Erik and Peter. Shares of the retailer closed the year up nearly 63 percent on the successful positioning of its retail stores in key markets on both coasts and such moves as buying the Jeffrey chain of four fashion boutiques and signing Jeffrey Kalinsky as a key fashion merchant for Nordstrom.
- Lew Frankfort, chairman and ceo, and Reed Krakoff, creative director, of Coach, which had its shares rise over 21 percent. Frankfort has about 4 million shares that jumped in value to about $133 million from roughly $110 million, according to WWD estimates.
- Shareholders of J.C. Penney & Co. Inc. Chairman and ceo Myron “Mike” Ullman 3rd helped boost the share price 35.7 percent for investors by successfully following through on the turnaround of the retailer that was initiated by former ceo Allen Questrom.
Companies that closed the year with lower valuations include Nike Inc., Kohl’s Corp. and Wal-Mart Stores Inc., which watched their stocks fall 3.1, 1.4 and 11.2 percent for the year, respectively. Other disappointments include Gap Inc. and Jones Apparel Group, which dropped 15.7 and 15.9 percent, respectively. These declines stung shareholders as well as the executive leaders who hold stakes in their companies.
Peter Boneparth, chairman and ceo of Jones Apparel, for example, watched the value of his owned shares (and rights to acquire shares) fall from about $83 million earlier in the year to around $70 million at the close, according to WWD estimates.
For the Walton family, which includes Alice, Helen, Jim, John and S. Robson Walton, who own about 40 percent of Wal-Mart Stores Inc., 2005 might be a year they would rather forget: The value of their collective shares fell to $194 billion at the end of the year from $219 billion at the start.
Regarding the outlook for 2006, economists are expecting global economic growth, but it may be tempered in comparison with 2005, so it’s unclear how the equity markets will play out. Looking at Wal-Mart, for example, Wall Street has yet to be inspired by any of the strategic moves made by the company. Investors see little substantial earnings growth coming out of Bentonville, and this is due to the retail giant’s massive size in terms of total sales and profits. Moreover, Wall Street’s fixation over same-store sales could work against the retailer. For 2006, Wal-Mart might try and convince investors to look at another financial metric to judge the valuation of its shares: return on invested capital.
Citigroup analyst Deborah Weinswig met with Wal-Mart brass last month. She said in a research note that Wal-Mart is now “intensely focused” on ROIC as a “key metric for decision-making and running the business.” Weinswig said short- and long-term levers for improving ROIC include labor expenses, top-line growth and inventory management. At this point, it’s unclear if investors will accept this strategy and reward Wal-Mart by trading its shares up. ROIC is not an easy metric to calculate.
For next year, Wall Street will likely keep an eye on more compelling stories, such as J.C. Penney and Kohl’s as well as the specialty retail segment and the European luxury brands. There are also a few initial public offerings in the works. IPOs tend to stir the equity markets more than mergers and acquisitions.
Wall Street is likely to keep a close eye on J.C. Penney to see how its turnaround plays out. Goldman Sachs analyst Adrianne Shapira said the upside to its stock was “far from over.” The analyst said recent meetings she had with the retailer “suggest that IT, merchandising, and sourcing should continue to yield significant upside to top line and margin. We believe that the shares remain a compelling long-term investment vehicle with 13 percent upside potential from current levels.”
Another retailer serving the moderate sector investors will closely watch this year, but for different reasons, is Kohl’s and its initiatives with designer labels. In a separate report, Shapira praised Kohl’s for lining up Vera Wang for a Holiday 2006 rollout. The analyst explained the “success of Isaac Mizrahi at Target as well as Nicole Miller’s successful straddling of its high-end doors alongside J.C. Penney has several designers seeking mass appeal.” She said Kohl’s has been gaining “greater fashion credibility with its recent introductions of Chaps, Candie’s, and Daisy Fuentes.”
Shapira went on to say that consumers have “raised the bar for retailers and the winners will be those who deliver newness at a price.”
In the specialty retail segment, 2006 might prove to be more challenging than 2005 as new concept rollouts take shape, and market share from competitors in the channel. But there will be clear winners. Citigroup analyst Kimberly Greenberger said in a recent research note that Urban Outfitters’ “long-term story is more compelling than ever.” In a meeting with the specialty retailer’s management, the company indicated that it was changing its fashion direction via new concepts while improving its inventory management.
Greenberger said as Urban “will near saturation of each of its brands over the next six to eight years,” management indicated that there is a “group working on identifying the next concept or concepts to drive the longer-term growth of the company.” She said the retailer said it was not “interested in chasing value apparel, competing in the oversaturated teen sector or operating stand-alone men’s or home businesses.” Greenberger said lingerie and brand extensions “were mentioned as possibilities, and we believe that the company will continue to focus on upper to upper middle income customers.” She said the retailer “indicated that the company could have two or three different concepts incubating over the next four or five years with a first concept potentially launched by 2006.”
Jeffrey Klinefelter, analyst at Piper Jaffray, offered a similarly bullish view on another specialty retailer, Abercrombie & Fitch. The analyst has an “outperform” rating on the stock. In a research note last month, the analyst said Abercrombie represents “a well-balanced growth story with a portfolio of industry leading brands, all of which boast significant growth opportunities over the next several years.”
Last November, Abercrombie & Fitch opened a Fifth Avenue flagship, which is described by the company as a prototype of its “international stores in the future.” During the opening, management said the company plans to open additional flagships in Los Angeles and Las Vegas sometime this year, which will be followed by the company’s first overseas store in London in 2007.
Merrill Lynch equity analyst Mark A. Friedman said in a recent report that new concepts in the special channel will be “critical to growth.” New concepts recently launched or in the pipeline are coming from Gap, Aéropostale, American Eagle, among others. The nameplates include Martin + Osa (from American Eagle), Forth & Towne (from Gap), Jimmy’Z (from Aéropostale) and Neda by Bebe (from Bebe Stores). Friedman said, “with so many of the retailers close to saturation within the core brand the pressure is on more than ever to find new growth.”
Friedman also cautioned about a turn in the fashion cycle. He said the market has “come off a period of favorable fashion trends in color, denim and embellishments. As is typical this has rotated into a more subdued period. There is always newness in fashion; however, the level of ‘must-haves’ may not be as high and we could see some shift in spending out of apparel elsewhere.”
Regarding IPOs in 2005, top performers include Under Amour Inc., which had a return of over 200 percent since it went public. Another top performer that can boast over a 200 percent return since going public is Citi Trends, a strip mall-based, off-price retailer that targets primarily the African-American demographic, which is poised for significant increase in spending power from $585 billion in 2000 to $965 billion in 2009, according to a University of Georgia study.
Skateboard lifestyle retailer Zumiez was the top IPO in the specialty channel by bringing a 139 percent return to investors since it hit the market.
For 2006, the market will be watching J. Crew, which in November postponed its IPO plans until the early part of 2006. The retailer, majority owned by Texas Pacific Group since 1997, upped its planned offering of common stock last month to $355 million from $200 million, according to a Securities and Exchange Commission filing. But Crew, under Millard “Mickey” Drexler, is believed to have had a strong Christmas. In its most recent quarter, operating income rose 69 percent to $22 million from $13 million in the year-ago period while net income rose to $3 million, from a $10 million loss in the prior year, which was due to the higher operating income and a $4 million decrease in interest expense from debt refinancing in the fourth quarter of 2004. Revenues in the quarter rose 8 percent to $223 million from $206 million in the prior period.
One of the biggest questions on Wall Street, though, is how much momentum is left in the luxury sector. Merrill Lynch analyst Stacy Turnof said in a note that although “still notable, luxury sales are slowing.” Turnof said “sales have been particularly strong for the past two years in the luxury sector and in our view should slow slightly from the higher levels in 2006 resulting from a downturn in the fashion cycle.”
But Merrill Lynch’s Friedman described luxury as a hot spot. He said the “luxury segment remains appealing, particularly in the context of the critical boomer generation. This group remains dominant and as they become empty nesters they will have more time and money to spend on themselves. This includes quality apparel to high-end vacations and food to home merchandise.”
Dana Telsey, equity analyst at Bear Stearns, said in her December Luxury Ledger report that she expects “steady economic growth to continue in 2006.” She said in the U.S., economic expansion will be driven by “business investment and inventory rebuilding with further support coming from employment, which is at a record level, and personal income growth,” which are factors that will fuel sales in the luxury channel. Regarding the Eurozone, a weaker Euro “is contributing to growth in exports, which is fueling business investment, while employment and consumer confidence are also on the recovery track.”
Telsey said, “given a strong global macroeconomic outlook, luxury stock valuations remain near the top end” of her Luxury Stock Index peak in 1995. Telsey said she expects “luxury goods stocks to retain their multiples and continue to trade at a premium to the market.”
– With contributions from Amanda Kaiser, Milan; Jennifer Wiel, Paris, and Vicki M. Young, New York
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