American Luxury Is Finally in Vogue -- Heard on the Street

By Carol Ryan

European luxury brands tend to be better investments than American ones, but this year may be an exception.

Shares in Tapestry, the New York-listed holding company for labels including Coach and Kate Spade, are up 40% since the start of the year, while Michael Kors-owner Capri has gained 27%. That puts both stocks ahead of big European peers such as Hermès, LVMH Moët Hennessy Louis Vuitton and Gucci-owner Kering.

One reason is that the U.S. brands reported better than expected sales in their latest quarterly numbers, thanks in part to strong demand for designer clothing and handbags in China. Their e-commerce businesses are growing quickly: Tapestry's online sales have doubled in a year and now comprise almost 30% of turnover.

The two companies have also managed their inventory levels better lately, allowing them to sell more products at full price and increase their gross margins. And their valuations had more ground to make up after investors fled to the safest luxury stocks such as Birkin handbag maker Hermès throughout 2020.

American luxury names have sometimes outperformed in the past, but it isn't the norm. In terms of share-price gains, Capri has beaten Hermès and LVMH in just three of the last nine calendar years. The U.S. stocks have also been far more volatile, after several years of overexpansion damaged perceptions of their brands among consumers. While Europe's top couturiers have overexpanded at times too, on the whole they are better at managing their brand image. The continuity provided by anchor shareholders such as LVMH's Bernard Arnault, the world's second-richest man, may help.

Tapestry and Capri's store locations could work to their advantage in 2021, though. Both businesses still make around three-fifths of revenue in their domestic U.S. markets, where a strong economic rebound is boosting demand for high-end fashion. Lower exposure to Europe, where even the most global French and Italian brands still have a big presence, is a plus in the short term. Luxury sales in traditional hot spots such as Paris, London and Milan are expected to be sluggish until tourism recovers. Designer stores in Europe rely on overseas visitors for around half of their sales, Jefferies estimates.

The American stocks also look comparatively cheap at around 14 times projected earnings, below the 10-year average. Most European names command at least double that multiple and are finding investors increasingly hard to impress. On the day that Hermès reported blistering first-quarter sales growth of 44%, its shares inched up just 2%. The brand's Paris-listed stock currently fetches 56 times expected earnings.

Less exclusive brands and lower profit margins mean that U.S. luxury names will never be as highly prized as their European rivals -- either by shoppers or shareholders. But this year's broad economic recovery gives the more affordable end of the sector the chance to regain some lost ground.

Write to Carol Ryan at carol.ryan@wsj.com

(END) Dow Jones Newswires

May 25, 2021 05:55 ET (09:55 GMT)

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