Luxottica: An Eye for Emerging Market Growth

Luxury handbag maker Louis Vuitton surprised investors earlier this month. It appears that the venerable French brand is closing the doors of its flagship store on Paris‘s Champs-Elysées an hour early this fall. Is the high-end retail boutique another victim of a bad economy? Not exactly. As it would turn out, demand has been so strong that Louis Vuitton has to close early in order to preserve enough inventory for the Christmas season. Due to the massive rebound in demand, management is concerned that loyal customers will find empty shelves come December! Meanwhile, competitor Chanel has raised the prices of its classic quilted leather bags by 20 per cent due to strong demand, but it is not just women's purses that are selling well. Ferrari, the maker of high-end Italian sports cars, is on track for one of the best years in the company's history. EMERGING MARKET GROWTH STORY Yes, it would appear that the rich are back with a vengeance. But the story here is not just about high-income Americans and Europeans emerging from a nearly three-year slumber. The real engine of growth for the sector is in emerging markets, and particularly in China. According to the Financial Times, China already consumes 21 percent of all world luxury goods, and that number is only expected to grow. Even in 2009, a year in which world luxury sales fell dramatically, Chinese luxury sales grew by a staggering 20 percent. THE PLAY Herein lies an excellent opportunity. We can get emerging market growth without taking the risks involved with investing directly in emerging market stocks. And we can do it by buying shares in companies with some of the strongest brand equity in the world. Many of the best luxury companies trade only in Europe, but a few trade as ADRs in New York. One ADR that looks particularly attractive is Italian eyewear maker Luxottica (LUX). Luxottica is the number one seller of high-end sunglasses and prescription eyeglasses in the world. Its primary sunglasses brands are Ray-Ban and Oakley, and the company manufactures and sells via licensing agreements branded sunglasses for Brooks Brothers, Tiffany, Burberry, Prada, and plenty of others. The company also owns the retail stores LensCrafters and The Sunglass Hut among others. The company's biggest market is North America, but Asian and emerging markets collectively make up nearly 30 percent of the company's fast growing wholesale sales. Those emerging market sales are growing at a blistering pace as well—up 26 percent through the first three quarters of the year. If you expect Asian and emerging market currencies to continue to rise relative to the euro (Luxottica's reporting currency), then the company's profits could enjoy a nice pop come year-end. The stock has recently hit the top of the trading range that it has followed for most of 2010. See Figure 1, courtesy of Yahoo Finance. If Luxottica breaks convincingly out of this range—and I believe that this is highly likely—then the stock could have a ways to run. The stock nearly tripled coming off the panic lows of 2009, rising from $12 to just under $30 in just 13 months. Should investors embrace the luxury goods story—as I expect them too—we could enjoy another good rally. THE TRADE Buy shares of LUX above $30. Plan to hold for six to nine months or for a gain of 50 percent, whichever is hit first. Stop loss: Sell if stock falls below its recent lows of $22.00. Charles Lewis Sizemore, CFA This article originally appeared in SFO Weekly