Diana Katz, CFA, Equity Research Analyst with Lazard Capital Markets, tells Wall Street Week’s Jeff Salkin that the “consumer seems to be pretty resilient.” Ms. Katz covers apparel and footwear companies. In this video she discusses why “affordable luxury” is a winner, which retail giants spell trouble for big brands, and also why certain firms have too much exposure to Europe.
In Part Two of the video (below) Ms. Katz discusses the acquisition that could keep things comfortable for the maker of UGGs, and she explains which stocks she is avoiding.
FEATURED INTERVIEW – DIANA KATZ
Diana Katz, apparel and footwear analyst at Lazard Capital Markets, likes companies you’ve may well have never heard of, like VF Corp.(VFC) or Deckers Outdoor (DECK). What’s the appeal? “They own all the brands that you know about. They own The North Face, they own UGG, they own Timberland, they own everything that you wear.” For the most part, Katz says, these companies are cash rich and are very focused on international expansion. Earnings should do better in the second half of the year as pressure from rising cotton price subsides. Predominantly wholesalers, they also have higher-margin retail opportunities, both in the U.S. and abroad. “For the most part, I would say, these companies are very well positioned right now and the consumer seems to be pretty resilient, especially in the affordable luxury and high-end luxury,” Katz says.
Katz shies away from companies with big exposure to the troubled eurozone and firms that are larger and more mature than competitors. Guess? Inc. (GES), for example. “That would be a stock I would avoid,” says Katz, especially given its heavy penetration in Italy, with all the uncertainty about that country’s economic future. At home, Katz flashes a yellow light on companies that are largely dependent on malls and department stores that cater to promotion-minded bargain hunters who want a “really great deal.” “Working with department stores is a very hard job because if they have a poor winter, you’re on the hook for it if you are their wholesale partner, “says Katz. One big player in that area is Jones Apparel Group (JNY), whose Jones New York, Anne Klein and 9 West brands don’t have “very high brand equity.” “They are working to try to transform the business,” Katz says.
On the other side of the equation are companies that have “very strong brand equity and are more affordable luxury,” Katz says. “You see the consumer waiting out in line of these stories just to get in.” Katz got first-hand evidence of that on Presidents Day, when she did reconnaissance at an outlet mall. “You didn’t see lines outside of Burberry (BRBY), for example, or Gucci (GUCG). You saw the lines outside of Coach (COH), Michael Kors (KORS), Tory Burch (private) and UGGs, more businesses considered affordable luxury in that $200 space, and that’s where the consumer wants to spend,” she says.
Deckers Outdoor is a favorite. Ninety percent of Decker’s business is UGG, known best for those clunky sheepskin boots with an oh-so-comfy rep. The other 10 percent comes from two brands, Teva, known for its outdoor sandals, and Sanuk. Teva, Katz says, is creating a closed-toe year-round shoe to extend its season. Newly-acquired Sanuk features a shoe that has a sandal on the bottom. A big plus for Sanuk is its distribution through Nordstrom. “Another interesting point about Deckers is they’re very cash-rich,” Katz says. “Their cash per share at the end of the year could possibly be around $8 plus.” Deckers has beaten expectations for the last 26 consecutive quarters, and Katz, speaking on the eve of its latest earnings report, was looking for 15 percent sales growth. Deckers beat that handily, with fourth-quarter sales and profit both leaping 40 percent over the year-earlier period. But Deckers stock got pummeled Friday on the company’s forecast of just a 15 percent sales increase and flat earnings next year on soaring sheepskin costs.
With their cash-filled coffers, “this is one of the most acquisitive spaces out there,” Katz notes. VF Corps, whose brands includes The North Face, scooped up Timberland just last summer. Since then its stocks has rocketed from $90 to the mid $140s. Up to that point, the stock wasn’t selling at a fair multiple, Katz says. But with the Timberland deal “people woke up to how great the story is.” Expect more acquisitions going forward. “These companies have very strong balance sheets and they’re not afraid to lever up, either… Everyone’s looking for that next big Timberland acquisition out there that will really drive a lot of shareholder value.”