The Retail Sector, Part II: Jewelers

Last Tuesday I began a series on the retail sector starting with footwear. Now shoes may be a woman’s passion, but diamonds are definitely a girl’s best friend. In honor of Harry Winston’s stock breaking out yesterday, it’s only fitting that we break out our loupes and examine the bling space, especially considering that the holiday season is rapidly approaching.

Actually, there’s not much to write about since many of the major players–Cartier, Bulgari, and Van Cleef & Arpel–are either privately owned or are parts of large conglomerates. The priciest publicly traded companies are Harry Winston (HWD) and Tiffany’s (TIF) followed by the online diamond retailer Blue Nile (NILE). Rounding out the group are chain retailers Zale (ZLC) and Signet (SIG) (which owns Kay’s and Jared), Chinese jewelers Fuqi (FUQI) and LJ Int’l (JADE), and watch and accessory makers Fossil (FOSL) and Movado (MOV).

It’s not fair to compare Fossil with Harry Winston since it’s like comparing apples to skyscrapers, so I thought I’d compare the ones that I’ve paired above with each other.

Harry Winston (HWD), Tiffany (TIF), & Blue Nile (NILE):  These stocks suffered the brunt of the economic bad news and were grossly oversold. Although they’re trading well off their lows, they still have a lot of room to run, especially Harry Winston. Yesterday, this stock broke out of its month long base on heavy volume. There’s minor resistance at $15 and major resistance in the $23-$24 range.

As for Tiffany, the stock broke out October 6th on an analyst upgrade. It’s currently looking to push past its next resistance around $43 towards its all-time high of $57. Tiffany is the only company in this group that pays a quarterly dividend (D/Y = 1.7%), and it’s been raising it consistently since 2000 which is a cause to celebrate.

Blue Nile is the other luxury jeweler.  It doesn’t own any bricks and mortar stores; it’s presence is strictly online. The stock has been range bound for the past month channeling between $60 and $63. A break above the high point on decent volume would be the signal to take a long position. Next resistance at $73-$74.

Zale (ZLC) and Signet (SIG): It’s been a bumpy ride for Zale since recovering from a buck a share in March. It hit $8 briefly last month and if it can break through that again–as it’s threatening to do–I’d jump in.

It’s been smoother sailing for Signet but it’ll be rough seas for the stock if it can’t clear $30.  It’s $2 shy of that now.  I’d wait until it clears $30 or bounces off of $25 before buying.

LJ Int’l (JADE) & Fuqi (FUQI):  JADE put in an island reversal last week zooming up almost a dollar after an analyst upgrade.  The company recently raised third quarter revenue guidance which prompted the upgrade along with a price target of $6.75. In a detailed letter to shareholders, the CEO outlined the company’s expansion plans further into the Chinese market. This type of personal attention to shareholders is something that Warren Buffett is famous for and I’m glad to see it being emulated elsewhere, but for the stock to make it to the analyst’s price target, it’s going to have to clear the $4 mark which in the past has been a level of heavy resistance/support.

Fuqi is in the habit of blowing out earnings estimates. Of course, it’s only reported earnings four times but that’s still nothing to sneeze at. The company raised Q3 guidance to 44 cents per share, up from 31 cents the previous quarter as well as raising full-year guidance. Although the stock has fallen from its incredible run-up ($3 to $30), many feel it’s still undervalued, including Zack’s which recently added it to its buy list. An analyst quoted in a recent article in BusinessWeek also believes the stock is undervalued giving $52 as a 12 month price target citing a strong balance sheet, a dedicated management team, and a growing Chinese middle-class as the engines for growth.

Fossil (FOSL) & Movado (MOV):  Time has not been on the side of watchmakers. Both companies beat second quarter estimates but only Fossil raised full-year guidance.

An analyst upgraded Movado in September with a $16 price target saying that lower inventories could spur second half growth. On the other hand, others feel that lower inventories could also translate into lower sales unless the right products are stocked.

Not to be left alone, Fossil was also upgraded with a $32 price target. The analyst said that the company is branching out into licensing and other accessories that will spur growth.

Although both stocks are up three-fold since March, both are bumping up against major resistance–for Fossil it’s $30 and $15 for Movado. I’d wait for these levels to be broken before considering a long position.

Here’s a summary of the stocks mentioned in the article:

Jewelers 10-20-09

Click to enlarge

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