3 Overlooked Retailers Ready to Rise

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The end of 2012 is gearing up to be a boon for luxury retailers and investors. With companies increasing earnings estimates and recording excellent monthly sales figures, now could be one of the best times in recent years to get into the high-end space. While many of the companies at this end of the spectrum are already trading at high multiples, there are a few that have a good deal of room to run, and that most investors have overlooked. Here are my three favorites in the down-but-not-out category.

Everything old is new again
Some of the best investments are in companies that are fundamentally misunderstood. If you can understand a company before the rest of the market, you've got the upper hand on every other investor, who still thinks that the stock is sunk. Guess? (NYS: GES) is that kind of company. In the 1990s, Guess? was all stone-washed jeans and Anna Nicole Smith, but those days are long gone. Fortunately for investors, not everyone got the memo.

Unfortunately, consumers make up a large part of the non-memo-receiving group, and Guess? has struggled with consistent sales growth. Last quarter, the company watched as revenue fell 6%, and earnings per share dove 25%. North American stores also saw a 7.5% drop in same-store sales, with the only bright mark in the whole quarter coming from Asia. In that market, revenue increased 26%, but that only accounted for 11% of overall revenue. If Guess? is going to keep it alive, it needs to make a stronger push in North America and Europe, which combine to account for 79% of revenue.


Luckily, Guess? has a few tricks up its sleeve. First off, it has recognized the weak sales seen this year, and taken steps to clear out excess inventory before the holiday season. That should keep margins up, and hopefully help drive customers into the store in search of fashionable items, not just sales. On top of that, one of the biggest failures that management cited last quarter was the weakness of European tourism. That led to fewer customers in the major cities, buying fewer products. But the tourist season is over, and the company is not expecting any carry-over damage at the end of the year. If it can leverage its new inventory in October, then I think the company will be set for a strong finish to 2011.

Watch next quarter's results closely, as the end of the quarter is the end of October, when things should be picking up if the company has any chance of seeing a jump this year. I'm expecting good things.

Flying business, carrying Coach
I've been tentatively excited about Coach (NYS: COH) for a while now. The company is having an up-and-down year, with management predicting a weak end to the year, due to lower consumer confidence. But I think fear is unfounded. Companies like Michael Kors (NYS: KORS) have recently increased guidance for 2012, which I read as a sign of strength in the consumer base. Kors raised earnings per share guidance by 15% last week, due to strong brand-driven demand.

The danger for Coach investors, and the reason that Coach is trading at a forward P/E of only 12, is that management has said next year is going to be an investment year. That seems a lot like code for slow growth. But I think that Coach has set its sights too low, and that investors are going to be pleasantly surprised when the company reports earnings later this year. While investing in Kors, with its forward P/E of 30, demands happy surprises, with Coach the risk investors need to assume is much lower.

Ringing in a new era
Silver champion Tiffany (NYS: TIF) is the last low-lying company that I want to look at today.  Tiffany had a horrible middle of the year, with the stock trading down 24% from the beginning of 2012 due to lowered sales and earnings guidance. But then things picked up in line with the rest of the luxury goods world, and now the jeweler is up 19% from its previous low point.

The last quarterly earnings statement came in aligned with the company's expectations. Top and bottom lines both grew 2%, with same-store sales down 3%. Like Guess?, Tiffany has seen stronger sales in Asia, with Japanese stores growing same-store sales by 12% last quarter. But in order to really make an impact on the bottom line, U.S. sales need to rise. The end of the year will be telling for Tiffany, which has a lot riding on the Christmas season.

Tiffany is the stock I'm least confident in, and I worry that the brand might be diluted with new products launching this year. Tiffany is trying to chase classic and trendy at the same time, and that could be a great move -- or a disaster. If you're thinking about adding this one to your portfolio, make sure you know what's in store for the brand before you buy.

While all of these stocks have something to offer investors, I'm most confident in Coach's ability to deliver -- and I'm not the only one. The Fool is offering a new special report on the "3 Companies Ready to Rule Retail," and Coach made the list. To see why, and to learn all about the other two companies, download your free copy today.

The article 3 Overlooked Retailers Ready to Rise originally appeared on Fool.com.

Fool contributorAndrew Marderdoes not own any of the stocks mentioned in this article. The Motley Fool owns shares of Coach and Tiffany.Motley Fool newsletter serviceshave recommended buying shares of Coach and Guess?.Motley Fool newsletter serviceshave recommended writing covered calls on Guess? and shorting Tiffany. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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