Tumi Looks Strong, but Still Too Pricey


Even though the markets took a breather while Hurricane Sandy blew through the most densely populated portion of the country, investors were still very impressed by luxury travel garment fabricator Tumi (NYS: TUMI) . The company beat expectations and posted some seriously impressive growth. All around, things look pretty good for the stock -- except its price. With the stock at a high premium to competitors, can Tumi's growth match its valuation? Let's take a closer look at earnings and see what we come up with.

Quick review
This year wasn't the greatest year to go public. Sure, the markets are up year to date, but with a few high-profile botched IPOs and global economic sluggishness, it's a tough time to be a new public company. Shortly after its IPO, Tumi took an extended trip down in stock price -- partially due to an overpriced initial offering. The dive lasted until the beginning of August, when the company exhibited signs of encouraging growth amid a global economic slowdown. Now the stock is around $22 per share -- 17% below its IPO price. That may not seem like good news, but the third-quarter earnings report was certainly a move in the right direction.

For the quarter, the company posted net sales of $95.9 million -- a good bit higher than the $78.4 million seen in the year-ago time period. The source of the 22% surge in sales: an increase in the number of company-owned stores and an increase in sales per square foot. Tumi opened five new stores this quarter, and 16 so far this year. The expansion isn't slowing down anytime soon, either, as the company plans to open between eight and 16 new stores every year for the next three years.

The key to success going forward, in my view, will not be simply a factor of building more stores, but focusing on that sales-per-square-foot figure. Currently, sales per square foot amount to $1,021, up from $972 in December 2011. A 5% increase in sales per square foot is nice, but the company will need to further optimize its distribution and retail operations in order to get that figure up to a more attractive level.

The most impressive of the numbers offered by the company were on the net income line, where profit was up tenfold from the prior year. Specifically, Tumi earned $10.5 million, up from $1.6 million the year before. Why such a massive gain at the end of the list when the top line was just 22% higher than the year before? For one thing, the company's marketing expenses decreased a little bit this year and yielded a higher return, and sales were up as mentioned. But the big reason was an expense item in last year's results, a dividend expense for mandatorily redeemable preferred stock. The company used its IPO proceeds to rid itself of this liability going forward.

Buy the growth?
With the stock below its IPO price and further evidence of growth going forward, investors may be interested in taking a position. It may even remind some of the Michael Kors (NYS: KORS) story, which has rewarded investors with a one-year return of about 125%. Between 2011 and 2012, Michael Kors increased top-line sales by a whopping 62%.

The problem with Tumi is that even though it's a high-growth brand with strong international prospects, it trades a bit steep for my taste at nearly 30 times forward earnings. With the preferred share expense omitted from last year's income statement, the company's growth was 43% year over year. The company would have to maintain very high growth to justify its valuation for the next few years. Though it was able to accomplish this in the past, the murky state of the global economy, particularly in China, where the company found a good chunk of its growth in prior years, makes me question whether the growth is sustainable.

The company is no doubt performing well, but its stock price, just like its products, is a little rich for my taste.

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The article Tumi Looks Strong, but Still Too Pricey originally appeared on Fool.com.

Fool contributor Michael B. Lewis has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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