Shares of luxury shoe firm Jimmy Choo (LSE: CHOO) are up 6% in early trading after the company’s board disclosed it was beginning the formal sale process and inviting bidders. But should outside investors view this as a sinking ship to avoid at all costs or as an opportunity to lock in a premium purchase price by a potential buyer?
On the face of it now would seem an odd time for the board to put the company up for sale. Full-year results announced in early March showed a 14.5% year-on-year rise in revenue and 42.6% leap in operating profits as the company opened new stores.
However, if we dig a bit deeper into the company’s financial results we see all is not going so smoothly. Stripping out the effects of the weak pound sends year-on-year sales growth plummeting to a downright low 1.6%. And if we take out the positive effects of new store openings, like-for-like sales actually fell by 0.8% during the period.
A precipitous 13% drop in constant currency sales in the Americas, where the company is struggling to regain the luxury cachet it once held, drove much of this decline. The company is making headway in growing the brand in Asia, but sales from the region outside Japan are still only half of its American sales.
At the end of the day luxury brands are highly cyclical, subject to rapid changes in consumer preference and require an intense focus on valuation should investors want to reap large returns. Unfortunately Jimmy Choo does not look sanely valued to me at 20.4 times forward earnings given lacklustre sales growth and a very challenging global luxury market.
A white knight bidder may emerge willing to pay a significant premium to today’s share price but that is not a given. Investors need to ask themselves whether this is a stock they would want to own regardless of outside interest, and the answer for me is ‘no’.
Is there safety in size?Â
A more reliable long-term holding in the industry has long been classic British brand Burberry (LSE: BRBY). The company has a long history of re-inventing itself as new trends come about while still maintaining its luxury appeal with core consumers.
This is still true today even though the company’s share price has been on a tumultuous journey over the past two years. Much of this was caused by a rapid decline in sales in Hong Kong, but this was due entirely to an anti-corruption drive in China that caused previously big spending mainlanders to curtail their conspicuous consumption.
There are now signs this anti-graft campaign is over and Burberry has seen solid sales growth in Mainland China for several quarters, although Hong Kong continues to be a drag on overall sales. On the plus side, sales in the UK were “exceptional” during the latest period and drove European sales up by double-digits due to big spending tourists taking advantage of the weak pound.
Sadly, while Burberry is a well-run company with high margins, a healthy balance sheet and a strong creative team I would be leery about buying its shares today. This is due to slowing growth and a lofty valuation of 20.8 times forward earnings. Burberry is a great company but I would wait for its valuation to come back down to earth before I started a position.