The luxury goods industry is well-positioned to grow thanks to rising disposable income, convenient payment options and the rising influence of social media on fashion. The holiday season has seen a significant increase in the demand for luxury goods, leading to a boost in the performance of companies operating in this industry.
Considering these factors, soaring luxury stocks Gap Inc. (GPS), Ross Stores, Inc. (ROST) and Tapestry Inc. (TPR) could be solid additions to one’s portfolio.
Before delving deeper into their fundamentals, let’s discuss what’s shaping the industry’s prospects.
The luxury goods industry is thriving thanks to rising global demand fueled by social media and digital platforms, evolving customer preferences, the growing popularity of luxury products amongst millennials, a rise in disposable incomes, and an increasing preference for exclusivity.
Moreover, luxury brands are now able to cater to a broader audience due to the prevalence of online shopping platforms. The fast-growing middle class in countries like China, Vietnam, and India are all contributing to this growing demand for luxury items.
The luxury industry will also likely benefit from the growth in retail sales during the holiday season. The National Retail Federation anticipates record-setting sales of $957.30 billion to $966.60 billion in November and December, projecting a 3% to 4% growth over 2022.
The global luxury goods market is projected to reach $392.40 billion by 2030, growing at a CAGR of 4.7%. Additionally, the U.S. luxury retail market is expected to surpass $75 billion by the end of 2023.
Likewise, the global luxury fashion market is projected to reach $294.70 billion by 2028, driven by a growing affluent demographic, immersive digital shopping experience through the use of AR/VR, strategic branding, etc. Moreover, artificial intelligence is enhancing the industry’s prospects through chatbots, personalized recommendations, and trend predictions.
Considering these conducive trends, let’s analyze the fundamentals of the three Fashion & Luxury stock picks, beginning with the third choice.
Stock #3: Gap Inc. (GPS)
GPS operates as an apparel retail company. The company offers apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, and Athleta brands.
On September 6, 2023, Banana Republic, a GPS brand, launched BR Home, introducing a diverse collection of furniture and furnishings for bedrooms, living rooms, and dining rooms. The collection, crafted by global artisans, debuts online and in select U.S. stores at the end of September, with pop-up experiences in New York City and Los Angeles.
On August 1, 2023, GPS and LoveShackFancy launched a limited-edition, 76-piece capsule collection featuring women's, men's, kids, and baby apparel and accessories, merging GPS's iconic styles with LoveShackFancy's vintage-inspired florals.
Mark Breitbard, President and CEO at GPS, said, "Collaborations and partnerships give us the opportunity to reinvent and reimagine Gap's product icons, to remix the classic Gap logo that our customers love. The collection is unique and unexpected, and I'm excited for customers around the world across every generation to experience a little piece of the magic created with LoveShackFancy."
In terms of the trailing-12-month levered FCF margin, GPS’ 10.74% is 104.5% higher than the 5.25% industry average. Its 45.85% trailing-12-month gross profit margin is 29.3% higher than the 35.47% industry average. Likewise, the stock’s 1.29x trailing-12-month asset turnover ratio is 29.5% higher than the 0.99x industry average.
GPS’ net sales for the fiscal third quarter that ended October 28, 2023, came in at $3.77 billion. Its gross profit increased 3.1% year-over-year to $1.56 billion. Additionally, the company’s non-GAAP net income and non-GAAP earnings per share stood at $221 million and $0.59, respectively.
Also, for the nine months ended October 28, 2023, its free cash flow came in at $544 million, compared to a free cash flow of negative $689 million in the year-ago period.
Analysts expect GPS’s EPS for the quarter ending April 30, 2024, to increase significantly year-over-year to $0.11, and its revenue for the quarter ending July 31, 2024, is expected to increase 0.9% year-over-year to $3.58 billion. Over the past six months, the stock has gained 138.6% to close the last trading session at $21.28.
GPS’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and a B for Sentiment and Quality. Within the B-rated Fashion & Luxury industry, it is ranked #15 out of 62 stocks. To see GPS’ Value, Momentum, and Stability ratings, click here.
Stock #2: Ross Stores, Inc. (ROST)
ROST and its subsidiaries operate off-price retail apparel and home fashion stores under the Ross Dress for Less and dd's DISCOUNTS brand names in the United States. Their stores primarily offer apparel, accessories, footwear, and home fashions.
On October 11, 2023, ROST recently completed its fiscal 2023 store growth plans by opening 43 Ross Dress for Less and eight dd's DISCOUNTS stores across 22 states in September and October, totaling 97 new locations. With the expansion in both existing and new markets, the company aims to grow to at least 2,900 Ross Dress for Less and 700 dd's DISCOUNTS locations over time.
In terms of the trailing-12-month net income margin, ROST’s 8.75% is 93.5% higher than the 4.52% industry average. Its 10.85% trailing-12-month EBIT margin is 43.1% higher than the 7.58% industry average. Likewise, the stock’s 12% trailing-12-month Return on Total Assets is 200.9% higher than the 3.99% industry average.
ROST’s sales for the first quarter that ended October 28, 2023, increased 7.9% year-over-year to $4.92 billion. In addition, the company’s net earnings and EPS came in at $447.33 million and $1.33, representing an increase of 30.8% and 33% year-over-year, respectively.
Street expects ROST’s EPS and revenue for the quarter ending January 2024 to increase 23.8% and 10.2% year-over-year to $1.62 and $5.75 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 36.6% to close the last trading session at $137.41.
ROST’s solid prospects are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Momentum, Sentiment, and Quality. It is ranked #14 in the same industry. Click here to see ROST’s Growth, Value, and Stability ratings.
Stock #1: Tapestry Inc. (TPR)
TPR provides luxury accessories and branded lifestyle products internationally. The company operates in three segments: Coach, Kate Spade, and Stuart Weitzman.
On November 16, 2023, TPR opened a new Fulfillment Center in North Las Vegas, Nevada, utilizing advanced technology to improve operations. The facility, geared for multi-brand fulfillment, aims to distribute 22.2 million units annually, maintaining 4 million units for retail and eCommerce.
In terms of the trailing-12-month gross profit margin, TPR’s 71.36% is 101.2% higher than the 35.47% industry average. Likewise, its 10.99% trailing-12-month levered FCF margin is 109.3% higher than the industry average of 5.25%. Furthermore, the stock’s 20.60% trailing-12-month EBITDA margin is 88.8% higher than the industry average of 10.91%.
For the first quarter that ended September 30, 2023, TPR’s net sales increased 0.4% year-over-year to $1.51 billion, while gross profit increased 4.1% year-over-year to $1.10 billion. The company’s net income came in at $195 million. In addition, its net income per share stood at $0.84, up 6.3% over the prior-year quarter.
For the quarter ending December 31, 2023, TPR’s EPS and revenue are expected to increase 7.2% and 1.3% year-over-year to $1.46 and $2.05 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 33.8% to close the last trading session at $37.40.
It’s no surprise that TPR has an overall rating of B, which translates to a Buy in our proprietary POWR Ratings system.
It has an A grade for Quality and a B for Growth and Value. It is ranked #13 in the Fashion & Luxury industry. In total, we rate TPR on eight different levels. Beyond what we stated above, we also have given TPR grades for Momentum, Stability, and Sentiment. Get all the TPR ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
ROST shares were trading at $137.53 per share on Thursday afternoon, up $0.12 (+0.09%). Year-to-date, ROST has gained 19.89%, versus a 26.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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