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The Luxury of Success

BY Connie Robbins Gentry

Financial analysts have turned even more bullish on Coach, raising the 12-month target price for the high-end leather-goods and accessories company from $38-$40 to a range of $43-$45. Jim Hurley, managing director and senior retail analyst of the luxury-goods sector at New York City-based Telsey Advisory Group, credits the success to a “golden triangle” of converging events.

Increased customer traffic, inspired largely by new merchandise moving through store windows every month, combined with an improved conversion rate and higher average-transaction rates complete the tricuspid effect.

“Because the brand is so desirable, Coach has pricing power,” explained Hurley. “The strength of the product, the monthly flow of newness and the fact that sales associates are trained well all contribute to the success.”

Like many luxury brands, Coach, which recorded sales of $2.1 billion in fiscal 2006, has also honed a multi-generational appeal, offering a broader range of price points and infusing its designs with a fun and fashionable flair that attracts younger shoppers.

Additionally, Hurley described the management team at Coach as one of the best he’s ever seen.

“The company’s singularity of purpose and vision is outstanding; there is a very strong partnership between CEO Lew Frankfort and Reed Krakoff, president and executive creative director,” he said. “The management structure is very lean and mean, and the strength extends from the senior level to store-level managers. There’s a lot of bench strength at Coach.”

For privately owned retailers contemplating the launch of an IPO, Hurley said the two critical factors are a strong management team that can inspire confidence within the investment community and a clearly articulated, easily understood growth strategy. Coach achieved both, and since going public in October 2000, has consistently impressed Wall Street.

As a whole, the luxury retail sector is a good bet for investments, and Hurley anticipates additional IPOs to launch with continued growth and prosperity in this niche. Two European retailers to watch are Salvatore Ferragamo, which is expanding its U.S. presence, and Versace, which Hurley suggested will refurbish its small network of U.S. stores and roll out additional locations in high-profile markets.

“One of the interesting things about the U.S. is that there are pockets of wealth outside the major cities; luxury retailers are opening stores in cities like El Paso, Texas; South Bend, Ind.; Charlotte, N.C.; and Rogers, Ark.,” he noted. “There is vibrant consumer interest for luxury brands in these markets, and Coach and Tiffany are probably the most aggressive about pursuing stores in these settings.”

Another advantage of opening stores in these smaller cities is that the profit margins can be significantly higher than in the major metropolitan areas.

“It’s not just that the rents are lower,” explained Hurley. “The cost of operations and labor are also reduced and the stores can be much smaller, where the retailer can manage its exposure and inventory with a very sharp assortment.”

Luxury retailers have also begun selling over the Internet, although even the most evolved e-commerce players are only seeing a modest 5% to 7% of their total sales generated online. Hurley suggested this is primarily because most luxury brands are global, and e-commerce remains most prevalent in the United States.

The luxury brands that might exhibit the highest stock performance in the coming months are Coach, Tiffany and Tod’s—an Italian shoe and handbag retailer that is focused on growth in the United States, noted Hurley.

“The growth strategies of these brands has been clearly articulated, and we also expect to continue to see improvements in their operating margins,” he added.

The product category among luxury brands that is perhaps the most sensitive is apparel, which he expects could be negatively impacted by the continued growth of fast-fashion retailers such as H & M and Zara.

“Apparel as a category is always more difficult than leather goods; however watches and fine jewelry are the most susceptible to shifts in the geopolitical environment,” Hurley said. “For example, if there was an escalation in war or terrorist activity, the climate would not be conducive to such highly discretionary products.”

A global trend that is benefiting luxury retailers is the fact that the weakened U.S. currency has prompted international tourists from emerging markets such as Russia and the Far East to travel and spend money on luxury items.

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Sears comps hurt by energy costs

BY CSA STAFF

HOFFMAN ESTATES, Ill. Sears Holdings today reported net income of $216 million, or $1.40 per diluted share, for the first quarter ended May 5, compared with net income of $180 million, or $1.14 per diluted share, for the first quarter ended April 29, 2006.

“In part, our domestic operating results reflect the impact of some of the same challenges being faced by our customers, such as rising energy costs and a slower housing market,” said Aylwin Lewis, Sears Holdings’ ceo and president. “However, as an organization, we need to overcome these factors by better controlling costs and developing innovative solutions that better meet our customers’ needs and allow us to generate a more reasonable level of profitability even in the face of such challenges.”

Domestic comparable-store sales declined 3.9% during the first quarter of fiscal 2007. Sears domestic comparable-store sales declined 3.4% for the quarter, while Kmart comparable-store sales declined 4.4%. We believe these declines reflect both increased competition and the impact of external factors such as rising energy costs, a slower housing market and poor weather conditions during the latter part of the first quarter of fiscal 2007. Kmart experienced lower transaction volumes across most merchandise categories, most notably within home goods, health and beauty products, and food and consumables. Similarly, Sears domestic recorded comparable-store sales declines across most merchandise categories and formats, with a notable decline in home appliance sales, which we believe reflects both a slower U.S. housing market and the impact of increased competition.

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Big Lots 1Q net sales up 3.4%

BY CSA STAFF

COLUMBUS, Ohio Big Lots today reported first quarter fiscal 2007 income from continuing operations of $29 million, or 26 cents per diluted share, compared to income from continuing operations of $14.5 million, or 13 cents per diluted share, in the first quarter of fiscal 2006. Including the impact of discontinued operations, first quarter fiscal 2007 net income totaled $28.8 million, or 26 cents per diluted share, compared to $13.7 million, or 12 cents per diluted share, in the prior year.

Net sales for the first quarter ended May 5, increased 3.4% to $1.13 billion, compared to $1.1 billion for the same period in fiscal 2006. Comparable-store sales for stores open at least two years at the beginning of the fiscal year increased 4.9% for the quarter.

For the second quarter 2007, the company expects income from continuing operations of 7 cents to 10 cents per share versus income from continuing operations of 4 cents per share last year. Comparable-store sales are expected to increase 2% to 4%, compared to a 5.2% comparable-store sales increase recorded last year.

For fiscal 2007, the company expects income from continuing operations of $1.25 to $1.30 per share versus income from continuing operations of $1.01 per share last year.

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